What is Cash Pooling?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 21 October 2016
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Cash pooling is a financial management strategy that allows companies to maximize both their current credit and debit positions so that the corporation receives the most benefit from those positions. In addition, it can help the company to avoid a number of costly bank fees, as well as help reduce the opportunity of damaging the reputation of the corporation because of negative balances on an bank account. In effect, this strategy helps the make the most of the resources that are available.

There are a few different approaches to cash pooling that will aid in cash management for both small and large companies. One basic approach involves the application of a cash management technique known as notional cash pooling. This involves transferring sufficient funds into one of the company's more active bank accounts to maintain a balance that will preclude the expenses of monthly finance charges or insufficient funds charges. From this perspective, the company achieves a higher net profit by eliminating unnecessary expenses.


Another approach is the concentration of cash into one central account. With cash concentration, the company maintains enough money in an account to not only avoid incurring bank fees, but also to generate some interest income from the balance. Many small businesses choose to pay all expenses from one checking account that is designated as an operations account. Maintaining a minimum balance above and beyond the usual operating expenses helps to ensure that at least some interest is earned on the operations account every month.

Cash pooling can often help to streamline the financial operations of a business, making it easier to keep up with cash flow. By using this strategy to avoid expenses that are not essential to the operation of the business, and maybe even create a small additional revenue stream through accrued interest, a corporation can build sufficient cash assets. These assets can be drawn upon when a downturn in the economy affects sales, allowing the company a chance to weather the depressed market. Once the market begins to swing upward and the demand for the company’s products return, the process can be used to replenish resources that were depleted during the downturn.


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Post 5

This kind of cash flow management can be really good for a growing company. People don't realize how much money can pass through a company in a given month for things like materials, payroll, expenses, and fuel. Keeping most of it in one central account and then moving money to other places as you need it makes it a lot easier to manage. My small store has been doing this for years, and it makes bookkeeping so much less of a hassle.

Post 4

Cash pooling seems to me to be a consequence of the way modern banking works. On the one hand it is necessary for companies to do this because there are so many bank fees and penalties and restrictions in place that they constantly have to jump through all these hoops.

I don't have much in my account and even I have to be aware of all the rules my banks places on me. But on the other hand, cash pooling is possible because modern banking makes it so easy to transfer funds between accounts.

With just a few clicks, huge sums of money can travel from one end of the world to another. From the way I understand it, cash pooling makes a lot of sense from the perspective of the company.

Post 3

@Mitchell14 - My college had a similar system but I never gave it much thought to be honest. I have noticed, however, that whenever they send out solicitations for donations (and they send out a ton of these) that there is always the option to specify where you would like your donation to be used.

You might dedicate it to the library or sports programs or scholarships. You fill out the checks in the same way, but presumably the money gets earmarked or placed into special accounts so that it gets used according to your specifications. I really like this idea, being able to help where you think it is most important.

Post 2

@mitchell14 - I know what you mean about it looking sketchy sometimes when organizations do this. They ask for money for a specific purpose, and then use it for something else.

I remember reading a while back that local governments in my state used to issue bonds to fund a particular project like building a school and then just use the money to pay bills or whatever.

People who voted for the money to fund the bonds because they wanted to help the school kids got mad when that money all went in the common pot, so the law was changed to force any money collected for a specific purpose to be used for that purpose.

Post 1

Sometimes, cash pooling looks a little questionable to outside observers. My college, for example, often pooled money that it received from outside sources- checks were always made out to the "general fund". I found this a little sketchy, because it made it hard to see where my tuition and other fees were actually going; even when I paid for things like food or books or class fees, it went to that "general fund". While it might have made their money issues simpler, it was more confusing for me.

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