Cash Pooling Or Concentration Of Balances

As group treasurer,you need to enable your cash in all your various banks to generate interest. Very often,you are being approach by banker(s) to do cash pooling or concentration of balances.

This articles look at what’s are cash pooling- its advantages and it basic mechanism.

Cash pooling is simply a banking structure where balances on a number of separate bank accounts are treated COLLECTIVELY for interest purposes. By pooling these accounts together or this concentration of bank balances,it optimizes the amount of interest companies both pay and receive as the bank who ask you to pool will consider the total “pooled”balance when computing the interest.

So,the main benefit of cash pooling is to improve liqudity management as total cash balances can then be managed centrally rather than locally.

Next,there are two ways of handling/conducting cash pooling:

- by the “physical”basis whereby funds are actually transferred from participant accounts into a master(or header) account at the end of each day or each week or each month.

-by the “notional”basis  where no physical movement of funds takes place. Here,the bank offsets the debit and credit balances of participating accounts to compute the pool’s net interest position. Certain countries like China do not permit the notional pooling basis .

• The Imprest System of Keeping Petty Cash