The ultimate goal of any for-profit enterprise is to maximise the wealth of the owner. To do that, it is essential for any business to manage the treasury. One of the main tasks for a CFO involves looking after the treasury and managing it in the best possible manner. Treasury management, also known as treasury operations, involves the management of a company’s holdings, with the end goal of managing the company’s liquidity and lessening its operational, financial and reputational risk.
Management of treasury can be achieved via cash flow management, short-term financing and medium-term financing. Hence, treasury management plays a crucial role by assuring that an organisation has the cash it needs at all times to run its business.
What is a cash pool?
The transfer of funds from various accounts into the primary account to improve the productivity of cash management is called a cash pool. A company is able to maintain a smaller overall cash balance by the pooling of cash into a single account. It also enables them to figure out excess cash which is available for investments in the short run.
It is important to understand the structure of cash flow for a better management and understanding of treasury and cash pool.
Understanding the difference between a physical pool and a notional pool?
Two main types of pools are provided by all those banks who provide this facility. These are
- Physical Pool
- Notion Pool
The primary type of pooling formation includes the physical movement of cash balances in and out of a single primary bank account. Cash concentration is the name given to this type of structure. Usually, a physical pool sets a target balance at the end of the day for each account in the structure. The account is funded by the centre if the balance is below that figure. The surplus is physically sent to the centre.
This scheme has two main variants:
The daily objective in case the pool is a zero-balance, is to leave all subsidiary accounts with a solid overnight balance of zero. The balance from the main concentration account is sent from all the accounts that are credited. The account which is in the debit will be funded from that particular account. The availability for overnight investment depends on the balance on the main concentration.
Pools that operate on a daily basis are mainly zero balancing. Nonetheless, it is possible to carry out schemes where the concentration happens lesser than usual. As such, application of target balance becomes necessary. The parameters to set the level involves setting the target balance at such a level that there is sufficient cash with the individual subsidiary for operational purposes. Different structures can set different levels of target depending on the fact that for some businesses, the primary focus is to generate cash and for others, it might not be the case.
No physical movement of cash is involved in notional structures. An offsetting of the debit balances is done against the credit balances for all those accounts which are within the pool without the movement of any fund between the accounts for notional pools to operate. In simple terms, in a notional pool, all accounts are treated as they are a part of zero balancing physical pool, however, movement of cash between the accounts is not present. Such kind of structure is also called interest compensation.
Hence, it is essential to ensure that any kind of cash pooling structure meets the specifications and the particular circumstances of the organisation as a whole. There might be a possibility that subsidiaries in countries which have difficult regulatory requirements are omitted from the structure, especially if they provide a small portion of the overall interest activity for the company.