Cash pooling
Money pooling is a type of money the board utilized by the parent organization and its subsidiaries [1].
Characteristics
Cash pooling is a type of money the executives utilized by the parent organization.The company may want to present money pooling for two primary reasons[2]:
- The firm might need to diminish its outer financing needs and decrease its accounting report. Each organization in a gathering as a rule has its own financial balances. On the off chance that the financial balances of gathering organizations are overseen as one net record (pooled), the gathering needs less money and can diminish its working capital.
- The second reason is that the firm might need to improve the gathering's net intrigue position and pay less for its outside financing Master record and sub-accounts. The pool regularly comprises an ace air conditioning check (the top record, called for instance the Group Account) and sub-represents every member Depending on the type of money pooling, the top record can be either a genuine financial balance or an invented record. Sub-accounts are utilized for typical money the executives exchanges and are genuine financial balances. On the off chance that the gathering has a Group Account, all sub-accounts are bank adjusts on the top record. At the point when reserves are paid in or pulled back from a sub-account, the absolute benefit capable parity on the top record is in a flash balanced. The top record is regularly held by the parent organization or a gathering treasury organization (ace organization). Any number of sub-records can be connected to the top record.
The main aspects of Cash Pooling
Legitimate tenets that oversee money pooling have just somewhat been approximated in the EU. For instance, viable money pooling is affected by organization law rules and the Second Company Law Directive. The Payment Services Directive will all things considered majorly affect money pooling. Cash pooling is constantly founded on an agreement between the taking an interest organizations and the bank Notional pooling is legitimately less muddled, in light of the fact that it doesn't result in any intercompany advances. Then again, notional pooling brings up something like two legitimate issues[3]:
- In what capacity will the expenses and advantages be apportioned between the taking part organizations?
- Do organization law rules, (for example, the motivation behind the organization and guidelines on the circulation of assets to investors) keep a taking an interest organization from paying costs, where the advantages are delighted in by other taking an interest organizations?
Gathering organizations ought to concur on the conveyance of expenses and advantages between themselves. Effective money pooling (money fixation) is legitimately progressively convoluted, because money pooling ereates advances and dehts between the taking an interest organizations Irreversible gifts or disseminations of assets may rupture law decides that oversee the creation of dispersions to sharcholders.
Effective Cash Pooling and Fictive Cash Pooling
There is a refinement between effective cash pooling (‘genuine money pooling" or money focus) and fictive cash pooling (notional pooling)[4]:
- Effective cash pooling, the firm has one genuine top record for all members and every one of the members has its own sub-account. The two fundamental techniques for ef fective cash pooling are Zero Balance Pooling and Single Legal Account. Effective cash pooling can be lawfully confused.
- Fictive cash pooling, can't be a notional top record. Notional pooling is legitimately less muddled than compelling money pooling.
Single Legal Account and Zero Balance Account in Cash Pooling
There are a two Accounts in Cash Pooling[5]:
- Single Legal Account is a money focus system based around a solitary lawful ace record structure for the sake of the parent or gathering financing organization where the other member accounts go about as update records of that legitimate record.
- Zero Balance Account is a money focus method where all record adjusts are moved into a designated ace record. A zero balance account is a financial balance that is naturally conveyed to a zero parity spelch day. Debits are secured by an exchange of assets from an ace record at a similar bank. Credit adjusts are naturally exchanged to the ace record.
Examples of Cash pooling
- Commingling: This is a type of cash pooling where a parent organization consolidates all of its subsidiaries’ cash balances into one single account. This allows the parent organization to manage its cash more efficiently and optimize its investments.
- Interest allocation: This is a type of cash pooling where the parent organization borrows funds from its subsidiaries and allocates interest payments between them. This allows the parent organization to reduce its overall cost of borrowing and optimize its investments.
- Notional pooling: This is a type of cash pooling where a parent organization allows its subsidiaries to share their cash balances without actually transferring the funds. This allows the parent organization to optimize its investments without having to manage multiple accounts.
- Zero balance account: This is a type of cash pooling where a parent organization allows its subsidiaries to maintain a zero balance account. This allows the parent organization to optimize its investments without having to manage multiple accounts.
Advantages of Cash pooling
Cash pooling is a system of intra-company money management that allows for the sharing of funds between subsidiaries and the parent company. It offers many advantages, including:
- Increased liquidity: Cash pooling allows companies to move funds quickly between subsidiaries and the parent company, making it easier to manage cash flow and liquidity.
- Improved efficiency: Cash pooling helps to reduce administrative costs, as the parent company can more easily and quickly access funds from its subsidiaries.
- Reduced risk: Cash pooling allows companies to spread their risk across multiple entities and to better manage their financial exposure.
- Increased control: With cash pooling, the parent company can exercise greater control over its cash flow, allowing for more strategic decision making.
- Increased visibility: Cash pooling gives the parent company a much clearer picture of its financial situation, as it can now access data on all subsidiaries. This helps with budgeting and forecasting.
Limitations of Cash pooling
Cash pooling is a method of money management used by parent companies and their subsidiaries. There are several limitations of cash pooling that should be considered before implementing this type of arrangement. These limitations include:
- Cash pooling requires extensive monitoring and reporting to ensure that all subsidiaries are adhering to the rules of the cash pooling arrangement. This can be time and resource consuming.
- Cash pooling can lead to an increased risk of fraud and misappropriation of funds as there is less control and oversight of the cash flow.
- Cash pooling can be complex and difficult to manage due to the different currencies, countries and legal regulations involved.
- Cash pooling may result in a loss of flexibility as all subsidiaries are required to abide by the same rules and regulations.
- Cash pooling can require a high level of trust between the parent company and its subsidiaries in order for it to be successful.
- Cash pooling can be expensive due to the additional costs of setting up and managing the pool.
Cash pooling is a type of financial arrangement used by a parent company and its subsidiaries that allows for the consolidation of funds. There are several other approaches related to cash pooling that can be used to leverage funds, streamline payments, and reduce costs. These include:
- Notional pooling: This type of cash pooling allows a company to net out balances between different accounts and branches within the same banking group, eliminating the need to make transfers between the accounts.
- Sweep accounts: Sweep accounts involve the automatic transfer of excess funds from accounts with high balances to accounts with low balances, allowing companies to maximize the use of their cash reserves.
- Zero-balancing accounts: Zero-balancing accounts involve the automatic transfer of funds from accounts with high balances to accounts with low balances, as well as the transfer of funds from accounts with low balances to accounts with high balances, so that all accounts remain at zero balance at the end of the day.
In summary, cash pooling is a type of financial arrangement used by parent companies and subsidiaries to leverage funds, streamline payments, and reduce costs. Other approaches related to cash pooling include notional pooling, sweep accounts, and zero-balancing accounts.
Footnotes
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| Cash pooling — recommended articles |
| Normal account balance — Collateral management — Initial deposit — Risk retention group — Cross margining — Credit sweep — Cash control — Centralized purchasing — Capital buffer |
References
- Jansen J.,(2011) International Cash Pooling.Cross-border Cash Management Systems and Intra-group Financing , European Law Publishers,p 2
- Mantysaari P.,(2010) The Law of Corporate Finance: General Principles and EU Law,Springer-Verlag Publish Company,p 70
- Pinetz E.,Schaffer E.,(2017) Limiting Base Erosion,International Tax Law,Vienna,p 329.
Author: Bohdan Zaporozhchenko
