Cash pooling - KPMG Germany (2024)

Keeping on top of a company's overall liquidity is the most important task that treasurers are faced with on a daily basis. This is why many companies establish a cash pool, which ensures that liquidity is bundled within the company. While this creates transparency, it also reduces costs by optimizing interest rates, for example. As companies become more international, cash pooling structures can become highly complex. In this context, forms of structuring such as cross-boarder, cross-currency or cross-banking are crucial. As a result, treasurers are faced with challenges not only because of the different liquidity requirements of the individual group companies, but also because of the different countries, currencies and banking partners that need to be taken into account. This is why the question should often be asked: Can the existing cash pooling solution still serve the company's needs?

Essentially, there are three basic instruments for cash pooling:

• Virtual Accounts
• Physical cash pooling
• Notional cash pooling

In the market, notional cash pooling has so far been regarded as an established alternative to the physical variant. In contrast, multi-currency notional cash pooling has so far been offered by banks only sporadically. The underlying concept here is also a non-physical cash pool, with the difference that different currencies are included. The foreign currency holdings are virtually converted and aggregated to a balance in the desired local currency. The first step is to select an overlay bank partner. This does not necessarily have to be the company's own bank, as this service is offered only by specialized banks. Subsequently, the participating corporate entities are identified and either the pooled master accounts or all individual, relevant liquidity accounts per currency are mirrored in the infrastructure of the company's own overlay bank partners. These mirror accounts then reflect the cash pool of all relevant liquidity holdings, irrespective of the currency in which the cash holdings are denominated. This gives treasurers an overall view of the organization's liquidity within a banking infrastructure. By means of the managed mirror accounts, treasurers have an overview of all liquidity holdings at a glance, regardless of where the liquidity is actually held. Finally, the overlay partner calculates a total virtual balance across all currencies. The conversion is based on the ECB fixing. By implication, this means that requirements in foreign currencies can be settled independently of the currency's current liquidity position. It allows the treasury organization to dispose of the desired amount in any agreed currency of its choice and to execute transactions. There is no physical transaction involved in this calculation of the total balance and the provision of all relevant currencies. As a result, there are also no conversion costs at master account level. The respective actual currency holdings remain unaffected. The advantage of this is that classic risks that occur, for example, in currency management for forex transactions are considerably reduced. It eliminates the need to hold specific currency pairs or analyze secondary currency pairs. As long as the technical possibilities are available, the virtual calculation process or account balancing can take place several times a day, thus providing treasurers with an up-to-date overall picture of the situation.

In this context, one must always ask whether and when which cash pooling method is worthwhile for the company organization. This largely depends on the individual business case. So, to determine the appropriate scenario for the business organization, parameters such as costs, fees, taxes, regulatory issues, the right bank partners with the appropriate banking services as well as volume of balances/transactions need to be taken into account. That is, the higher the balances that could be offset against each other and the higher the spread between borrowing and investing money, the greater the financial benefits of a cash pool. In this respect, multi-currency nominal pooling is attractive for companies that already have cash pooling in different currencies with substantial positive and negative balances that justify renewed interest netting.

Keeping an eye on a company’s overall liquidity is and remains a complex issue. Not only are corporate liquidity requirements constantly changing, but banks' cash pooling options and offerings are also evolving. This is why is it of utmost importance for treasurers to stay up-to-date on this topic so as to find the best possible cash pool solution for a resilient and future-proof treasury in this complex environment.

Source: KPMG Corporate Treasury News, Edition 129, January/February 2023
Authors:
Nils Bothe, Partner, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG
Sven Warnke, Manager, Finance and Treasury Management, Corporate Treasury Advisory, KPMG AG