Four years since the start of the crisis, prospects for a return to the days of free-flowing liquidity grow steadily more remote. As market turbulence continues, corporates across the globe have no choice but to adjust to a new environment in which bank-supplied credit lines will become even more restricted and expensive. In light of this, it is now more critical than ever for all companies – from growing businesses to established multinational corporations – to increase the visibility, accessibility and availability of internal company funds in order to decrease their dependence on external sources of funding. In turn, this is leading to an increasing focus on the importance of sound cash flow management.
Effective cash management techniques can significantly increase the amount of cash a company has at its disposal, make cash work harder for the organisation’s benefit, and improve risk mitigation. Cash pooling has long-been recognised as an effective and flexible cash management tool for these purposes, and as a step towards the creation of a more strategic company cash and liquidity management platform. As credit constraints continue, the use of cash pooling and similar practices looks set to increase in popularity.
In essence, cash pooling (also known as cash concentration) can allow corporates to address short-term funding needs internally, which means they can save money on expensive interim funding, such as bank overdrafts. While this offers a huge advantage, as any credit lines can be used strategically rather than solely for working capital purposes, the chief benefit is that pooling gives corporate treasurers improved visibility – and therefore increased control – of corporate cash. With cash centralised in a single account, funds can be made available where they are most needed, with positive and negative balances netted efficiently, leading to less-profitable parts of an organisation quickly being identified and any underlying problems swiftly addressed and resolved.
Companies looking to establish cash pooling arrangements have traditionally had two basic (and relatively straightforward) options available: notional pooling and zero balancing. Notional pooling works by calculating the debit and credit balances kept by the pool’s constituent companies, with interest payable calculated on the basis of the net result. The balances remain with each constituent and are not transferred to one separate central entity, which is ideal for organisations with decentralised treasury structures.
In the case of zero balancing – or ‘sweeping’ – the individual balances are transferred to the central entity allocated as pool leader, which extends cash to any constituent company with a debit balance so they are brought up to a zero balance at the end of the day. Both of these techniques have proved to be successful tools to help companies maintain their financial strength during challenging economic times.
Yet changing market dynamics, and the evolving corporate requirements that come as a result of these changes, are making cash pooling, and indeed overall cash and liquidity management, an increasingly complex affair. As globalisation gathers pace, treasurers are under growing pressure to take a broader, international approach to company cash management. In terms of cash concentration, this means a move from notional pooling, which has traditionally been restricted to same-currency accounts in a single location, to cross-border pooling solutions that can allow organisations to apply cash and liquidity optimisation techniques across countries and currencies. Such solutions can allow corporates to minimise interest costs by removing the need to transfer funds across borders and better leverage (on an aggregate basis) the balance of their funds in multiple currencies.
However, the development of global cash pooling services has, in many cases, served to expose the limitations of local and regional banks, on whom the majority of growing corporates depend for access to cash and liquidity management solutions. While these banks are experts in the needs and norms of their domestic markets, cross-border cash management can be a complex undertaking and many of these operators, without a global footprint, can lack suitable capacity, particularly on an international level.
Indeed, knowledge is vital with respect to cash and liquidity management. Although increasingly sophisticated technology and extensive correspondent bank networks are crucial for international cash management and pooling solutions, these elements must be underpinned by a sound knowledge and understanding of regulatory direction, accounting structures and reporting requirements – all of which differ from market to market and render cross-border cash concentration a significant challenge.
Local-global Bank Partnership
Despite such hurdles – not to mention additional pressures, such as the expense and burden of regulatory compliance – local and regional banks must find a way to support their customers’ evolving needs and ambitions if they are to maintain (and perhaps even expand) their existing client relationships. Given that very few – if any – local banks will be in a position to upgrade their technology offerings and construct a network from the ground-up, the most efficient way for these institutions to address the needs of their corporate clients is to enter into a collaborative partnership with a specialist global provider of cross-border cash management solutions.
That said, it is imperative they choose their partner wisely. The right global partner – and partnership – should do more than provide access to market-leading technology solutions and plug their local partners into an established global network (thus allowing them to tap into a continually expanding source of local market expertise and new market connections). The ideal partner should be able to grant local and regional banks the necessary agility to offer a tailored approach to addressing their clients’ specific cash management needs, which should help corporates to attain their individual treasury goals, and ease commercial expansion into new markets.
Indeed, as corporates increasingly look overseas for new business opportunities, tools that enhance international cash management, such as cross-border cash concentration, are likely to become an increasingly important element of corporates’ liquidity management solutions. As a result, it is up to local and global institutions to combine their best of their individual strengths to meet this need, and ensure that such solutions – that should be flexible enough to fit company-specific requirements – can be accessed at local market level. If this can be achieved the end result, from the corporate perspective, is sustainable solutions that allow them to decrease their debt dependency in both the short and long term, which is crucial to commercial stability and continuity in what are set to remain turbulent and uncertain times.
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