Cash pooling arrangements: a reflection on selected court cases
Cash pooling is a cash-management tool used by Multinational Enterprises (MNEs) to efficiently manage the short-term liquidity requirements of the various entities involved in the enterprise. This intra-group financing tool reduces the reliance of MNEs on third-party financing, thereby reducing banking costs and reducing financing needs by offsetting debit account with credit account. Centralizing the control and management of the shared cash pool to a single entity within the multinational group additionally allows all the cash pool participants to benefit from an optimization of the shared resources, better risk management and a better position towards third-party banks or financers.
17 Nov. '20 Birhanu Tadesse Daba
There are (basically) two types of cash pooling arrangements: physical and notional. Variations of the two types may be arranged to meet specific business strategies and needs. In physical cash pooling (also known as “target balancing” or “zero balancing”), all pool members transfer their bank account balances to a single bank account on a daily basis, adjusting surplus with deficit in order to achieve a target balance. Whereas, in notional cash pooling, the pool members are allowed to net balances without the physical transfer of balances. Cross-guarantees among the pool participants may be required in the notional cash pooling. The choice between pooling cash on a physical or notional basis hinges, among other factors, on tax implications, other costs involved, accounting standards adopted, applicable regulations and location of the cash pool members.
The advantages of cash pooling arrangements over regular loans could be summarised as follows:
- Reduction of banking costs and greater bargaining power with banks;
- Reduction of external financing needs by offsetting debit and credit within the group; and
- Optimization of financial resources and better risk anticipation and management.