Managing liquidity and cash is always critical, even more so when you are a multinational corporation that needs visibility and control over cash at a regional and global level to better manage liquidity across accounts, subsidiaries and borders.
Cash Pooling is one method for these multinationals to gain that visibility and control — but is there a way to significantly improve the process for those using cash pooling?
There is, with bank APIs.
Read The Essential Guide to Bank APIs
What is cash pooling?
Cash pooling is a cash management strategy that centralizes cash management by balancing the accounts for a group’s subsidiaries, under a controlling company (or centralized treasury center), to optimize liquidity management across the entire group. This allows the individual companies within the group, now acting as a single unit, to automatically fund one another and allowing a single entity to manage cash pool balances, limiting external borrowing and centrally investing which results in a higher return.
By using cash pooling, the company’s subsidiaries in this pool can use internal corporate cash instead of borrowing from the bank for day-to-day working capital.
This centralized view of subsidiary bank account balances allows the CFO a 360 degree view of cash and liquidity of the group, enabling a better view of the status of their global cash position.
Approaches to cash pooling
There are two primary approaches to cash pooling:
- Physical pooling: allows the actual physical funds in the pooled entities separate accounts – at the same bank – to be automatically swept to or from the master or control account. Physical cash pooling involves real cash flows between the master account and the accounts of the subsidiaries – typically end of day cash balances are swept to the master account — and can be used across multiple legal entities, located in the same or different countries, on a currency-by-currency basis.
- Notional pooling: allows for calculating interest on combined credit and debit balances of accounts included in the pool without transferring funds between the accounts. All accounts in the group operate independently and manages its own credit lines, and the accounts of each subsidiary are then merged virtually. The main advantage of this method is that each entity of the company remains independent within the group while benefiting from more attractive interest rates for borrowing or lending than they would have as a separate entity.
Most often a cash pool will be implemented on top of existing accounts, usually within a single bank. One account becomes the main or header account, which cash sweeps into and the rest are associated as sub-accounts which cash sweeps out of to the main account.
If your Treasury Management System (TMS) handles your pooling, you can schedule sweeps from sub-accounts across banks by initiating a transfer. From the bank’s perspective, all they’re doing is moving your money around, though you will probably lose the advantage of the reduced transaction fees you get by using a single bank solution, and transfers may not be as quick.
Benefits of Cash-Pooling
Though cash pooling comes with some risks, specifically the need to evaluate its efficacy for your company based on tax and regulatory changes that have taken place over the last few years, the broad advantages of cash pooling include:
- Enhancing the visibility and control over group cash
- Reducing external banking costs due to centralization
- Reducing financing costs on a group level
- Improving ROI due to economies of scale
- Improving risk management
Read The Essential Guide to Bank APIs
What can Bank APIs add to the process?
Bank APIs further enhance visibility into the cash pool balance by giving real-time visibility into the individual account balances resulting in a highly accurate forecast of the end of day pool position. This visibility grants group treasurers the ability to be more efficient with their capital allocation borrowing less and investing more simply by always knowing their cash balances.
This real-time view further allows you to:
- Get up-to-date cash balance information. Bank API connectivity means you can instantly refresh information on your current balances and make sure enough cash is available to process payments as well as gain an accurate cash position. If an entity in the cash pool is sending a large wire to a new vendor, end-to-end payment tracking allows you to track the payment’s journey in real time, regardless of which entity in the cash pool originates the payment.
- Accelerate payments by revamping manual processes. By processing payment requests faster with automated approval workflows, you have the option to speed up the time it takes to pay those invoices. This can improve relationships with your vendors, who may be more willing to extend credit or offer a better deal in the future.
- Refresh stale data. Rather than relying on out-of-date information, you can keep data fresh using bank APIs—meaning you always know how much cash is on hand and what your financing options are at any entity in the cash pool.
- Avoid bottlenecks due to incidents and exceptions. Any exceptions can be handled in the moment since your data is fully auditable, transparent and updated in real time.
- Improve visibility of bank fees. With more visibility of bank fees for your cross-border payments, you can identify the total cost of a transaction with each bank. This transparency puts you in a better position to negotiate with future partners.
- Reduce fraud risk. With data updated instantly, users can quickly spot any discrepancies in dollar amounts or account information. In addition, enforcing tight-access management controls, implementing automated workflows, and reducing the number of hands a payment touches can all reduce the risk of both internal and external fraud.
Conclusion:
Cash pooling minimizes trapped cash by consolidating asset balances to cover liability balances at a bank/cash pool level. With API enabled cash management, you can be even more efficient by knowing with high certainty the balance of the cash pool, as a whole during the day, allowing you to run a tighter ship, and invest more and borrow less.
By harnessing these tools that provide clear visibility over the company’s cash flows and credit lines, organizations can take the necessary steps to optimize liquidity, secure funding when needed, manage supplier and customer relationships more effectively, and head off any potential issues before they arise.
