Optimising surplus cash by setting up a cash management system

This page was last modified on 30-01-2013

Cash management is a method which enables the business to centralise the management of its cash so as to optimise the distribution of cash in the different accounts of the business or its subsidiaries. The objective of cash management is to improve the management of and return on the business’ cash. This can be done by:

  • transferring funds to accounts which have a negative balance in order to avoid high debit interest;
  • transferring funds to a single account to optimise interest income by offsetting credit and debit positions.

Thanks to the international cash management system, the business can access all of the information that is useful for its cash management at any time.

Objective: cash management allows for optimised cash management and the investment and productive management of the business' cash.

Who is concerned

Cash management applies to large multinational businesses in particular, but also to any other business seeking to reduce its financial expenses without reducing the number of accounts.

Cash management is especially useful for large groups:

  • comprising several companies that have very different cash positions;
  • that are active in more than one country in Europe or even outside Europe, through daughter companies, subsidiaries, or simply suppliers or customers abroad;
  • which have a large number of bank accounts in several countries;
  • which are considering centralising their cash and financial services;
  • which want to optimise their cash or credit management.

Prerequisites

  • business activity must be international with at least some customers or suppliers abroad;
  • the accounts of the business' subsidiaries must be at the same bank;
  • the business' bank must be represented in the target country through subsidiaries, branches or partnerships with other banks;
  • the use of the MultiLine system is an advantage as it makes the transfer of funds easier.

How to proceed

Cash management offers 2 different techniques which enable cash management to be optimised, namely:
  • cash pooling: physical transfer of funds;
  • notional pooling: virtual transfer of funds.

The aim is always to limit financial charges and improve cash management by avoiding the coexistence of credit and debit balances on different accounts within the group.

Cash pooling

Cash pooling (centralised cash management) allows the cash of a group’s companies to be grouped together on a single bank account. The business chooses one main centralising account (the master account). The other accounts included in the pool are regularly debited or credited via the centralising account. Cash pooling is always carried out via physical transfers of funds.

Advantages

  • management of a single account and thus reduction in financial charges;
  • higher net return since the interest due on overdrafts is reduced – or even avoided entirely;
  • simplification of cash management by means of computerised reporting and the automation of numerous transfers;
  • reduction in debt by offsetting debit balances with credit balances.

Disadvantages

  • high administrative costs due to managing the centralisation of cash;
  • need to set up a credit limit to guarantee against the temporary lack of funds in the centralising account;
  • increase in the amount of calculations and accounting entries and in the remuneration of intra-group loans;
  • reduction in the management autonomy of the subordinated accounts.

Risks

There may be legal and tax consequences in some countries where intra-group transfers are considered to be loans.

Notional pooling

Notional pooling (interest scale) is used to reduce the interest to be paid and increase the interest to be received by virtually offsetting debit and credit balances. The business is not obliged to record its daily transactions, but it receives interest on the accumulated balance of the participating accounts and not on each of the accounts separately. Debit and credit interest is recalculated each month based on the virtual net balance calculated on a daily basis. There is no physical transfer of funds.

Advantages

  • higher net return thanks to the virtual offsetting of debit and credit balances;
  • reduction in financial charges since there are no physical transfers;
  • multi-currency system which allows accounts in different currencies to be included;
  • management autonomy for each of the subordinated accounts;
  • legal validity with respect to the tax authorities as not considered to be a transfer of profits via 'intra-group loans'.

Disadvantages

  • inflexibility due to the difficulty of managing the group’s net position;
  • entails a greater use of credit lines than with cash pooling as each account can be in a debit position;
  • no reduction in debt in the balance sheet of the domestic business entity.