Cash Management: Cash Pooling

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Name: Dina Mohanna Rbea’an
Subject: Cash Pooling
Supervisor: Dr. Nasser Abu Mustafa
University: NYIT 
Cash Management: Cash pooling

The role of the corporate cash manager has been continuously revised over the past few years, as a result of the demand for more effective and efficient ways to support the core needs of the organization. This has resulted in new responsibilities for the corporate treasurer and cash manager. The cash management function is demanding more accurate and continuous information on its cash position to provide responsive forecasting data and handling, so that availability of liquidity at the right time and price can be ensured. So this paper studies the Cash Management concept and focus on the cash pooling and whether it’s applied in the Middle East.

The objectives of cash management are straightforward – maximise liquidity and control cash flows and maximise the value of funds while minimising the cost of funds. The strategies for meeting such objectives include varying degrees of long-term planning requirements. Also, like everywhere in the world, much treasury activity in the organizations is concentrated on cash management. This includes financing the corporation, administration of debts (loans, bonds, commercial papers, etc.), good relationships with the banks, payments to suppliers and collections from customers, control of foreign currency and interest positions according to the company’s needs for finance, and finally the reporting and technical support of all these functions. The use of cash pooling as a global standard for concentrating cash into the main bank account of the firm has very quickly found favour in corporations.

Cash pooling enables corporate groups to minimize expenditure incurred in connection with banking facilities through economies of scale. Under a cash pooling arrangement, entities within a corporate group regularly transfer their surplus cash to a single bank account (the “master account“) and, in return, may draw on the funds in that account to satisfy their own cash flow requirements from time to time. The master account is usually held by the parent company or by a “Treasury Company “established specifically for this purpose. Depending on the type of cash pooling arrangement, the participating entities may transfer either their entire cash surplus (“zero balancing“), or cash exceeding a certain surplus level (“target balancing“). In general, all entities participating in the cash pooling arrangement will be liable for any negative balance on the master account, irrespective of the amount they have contributed. Transfers and draw-downs of funds to and from the master account by the participating companies have the nature of the grant and repayment of intra-group loans. In addition to physical cash pooling there is also “notional“(also known as “virtual“) cash pooling. This does not involve the physical transfer of funds, but rather the set-off of balances of different companies within the group, so that the bank charges interest on the group‘s net cash balance. This optimizes the position of the group as regards interest payments, but does not achieve optimal allocation of liquid funds as between the group members.

Notional cash pooling will not result in the creation of intra-group loans, since funds are not physically transferred. As such, many of the risks outlined in this brochure do not apply to a purely notional cash pooling arrangement. In practice however, a notional cash pooling arrangement will frequently involve the grant of cross-guarantees and security by the participants to the bank, in order to maximize the available overdraft facility. To this extent, many of the risks outlined in this article could be relevant, even if the cash pooling arrangement is predominantly notional in nature. The specific structure of individual cash pooling arrangements...
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