Cash pooling and netting in international Treasury

Why are cash pooling and netting important? Permjit Singh Treasury Consultant finds out

It is hard enough for a business to make money, without wasting it on unnecessary bank interest charges, so any process that can reduce a company's overdraft charges or better still, generate additional interest, is welcome by a corporate treasurer.  Cash pooling is one such process.

In essence, bank accounts held at a company's subsidiaries can be stand alone so any surplus earns interest, usually peanuts, such as 0% or 0.1% per annum.  Any overdraft is charged interest, usually a very high rate, such as 8%pa.

To avoid paying overdraft interest, stand alone bank accounts should be pooled and netted off each day for interest calculation purposes.  That way, the company avoids overdrafts or reduces them by the amount of surplus cash it has on some of its accounts.

A simple example will illustrate the savings to be made from cash pooling:

A company subsidiary (A) has an overdraft of £100K and is charged 8%pa overdraft interest, so £8K per annum.  Subsidiary B however always has a surplus of at least £100K on its bank account.  It earns a generous 1%pa (£1K).

By pooling the two accounts, the company will avoid paying £8K overdraft interest per annum, and make a net saving of £7Kpa.

With multinational companies holding thousands of bank accounts across dozens of subsidiaries across the globe, each with surpluses or deficits of cash, the savings for a Treasurer from effective international cash pooling can run to the £millions per annum.

To discuss Cash or Treasury management for your company, including interim Treasury management, funding, and financial risk management, contact me for a free, confidential chat without obligation.