Cash pooling arrangements

Cash pooling arrangements – Cash pooling enables corporate groups to minimise expenditure incurred in connection with banking facilities through economies of scale.

Under a cash pooling arrangement, entities within a corporate group regularly transfer their surplus cash to a single bank account (the “master account“) and, in return, may draw on the funds in that account to satisfy their own cash flow requirements from time to time. The master account is usually held by the parent company or by a “treasury company“ established specifically for this purpose. Cash pooling arrangements

Depending on the type of cash pooling arrangement, the participating entities may transfer either their entire cash surplus (“zero balancing“), or cash exceeding a certain surplus level (“target balancing“). Cash pooling arrangements

In general, all entities participating in the cash pooling arrangement will be liable for any negative balance on the master account, irrespective of the amount they have contributed. Also note that the cash pooling may require special disclosures in respect of the (consolidated) statement of cash flows. Cash pooling arrangements


The growth of multinational groups of companies has also lead to multi-jurisdiction presence and multi-currency operations, which subsequently lead to a geographical spread of cash. Limited visibility and control over this cash, increased administrative burden, as well as cash trapped within countries with capital controls.

As a result multinationals establish(ed) smart cash concentration structures in order to achieve alignment of their cash management strategy with their growth plans. A sophisticated cash concentration structure is reflected in the organisation’s financial results, whilst it can also contribute in meeting other objectives on the Treasurer’s agenda, such as optimisation of the interest expense, foreign exchange risk management and reduction of external borrowing.

Physical cash pooling (zero or target balance)

All cash balances in the pool are physically transferred on a frequent basis to or from a single account (the cash pool header account), depending on whether there is an excess or a shortfall of cash in the participating bank accounts. In this way, interest applied on the cash balance is optimised, as it is applied on the balance of the header account (i.e. the net balance of the pool).

Cash pooling arrangements

The above example illustrates the mechanics of a zero balance structure. In the absence of such a structure, the cash balances of Entities 1, 2 and 3 in Austria, Germany and France, respectively, remain in their local bank accounts and interest is applied on each of them individually. With a zero balance pooling in place, the entire balances of Entities 1, 2 and 3 sweep automatically to or from the cash pool header account, with the end balance in the local accounts becoming zero. Interest is then applied on the balance of the pool header account.

The same principle applies in a target balance structure, with the only difference being that the end balance in the local bank accounts is not zero. Instead, it is a specified balance of the company’s choice, depending on the nature and the purpose of the local account, as well as on each entity’s needs.

Notional cash pooling

In the case of a notional pool structure, there is no physical movement of funds between accounts. The individual cash balances are instead virtually netted off against each other, and interest is applied on the net balance of the pool. Therefore, interest optimisation may be equally achieved.

Cash pooling arrangements

The above example illustrates the mechanics of notional pooling. In the absence of a notional pooling structure, interest is applied on each of the individual balances of Entities 1, 2 and 3 in the UK. With a notional pooling structure in place, interest is applied on the net balance of the three accounts (and paid in one of the accounts of the company’s choice), without the physical transfer of funds within the pool.

Key features

The table below provides an overview of the typical features for each of the two pooling structures presented above. In practice, for some of the below features, there is space for manual intervention in order to achieve customised solutions tailored to an organisation’s needs and objectives.

Zero or target balance structure

Notional structure

Physical transfer of funds

×

Bank accounts in different currencies

×

Bank accounts in multiple banks

×

Bank accounts in multiple countries

×

General model of measurement of insurance contracts

Arrangements Cash pooling arrangements 

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