What it means
A company with several divisions, subsidiaries or locations often has many bank accounts. Some hold more cash than they need, while others run short.
Without coordination, a business can pay overdraft charges in one account while idle money sits in another. Cash concentration solves this by sweeping surplus balances from the local accounts into a master, or concentration, account.
Banks can set this up as an automatic daily transfer. Each local account may keep a target balance, so that day-to-day payments can still be made.
The benefits are control and cost. Treasury (the team managing the company's cash and funding) can see the total position instantly, and make better decisions about borrowing and investing.
Large pooled balances often earn better interest rates, and using surplus cash to pay down debt avoids interest expense. There are two common forms.
Physical concentration, sometimes called a zero-balance or target-balance sweep, actually moves the money. Notional pooling leaves the money in place but lets the bank net the balances for interest purposes, which can avoid legal or tax complications with transfers.
Cross-border concentration is more complex. Different currencies, exchange controls and local tax rules can limit what a group can move, and intercompany loans created by the sweeps need proper records and arm's-length interest (a fair market rate between related companies).
Treasury and tax teams usually work together on the design. Setting up a concentration structure takes planning with the bank.
The company must agree which accounts are swept, how often, what the target balances are and who can authorise changes. Clear internal rules prevent staff from opening new accounts that sit outside the structure.
In practice
Real-world examples
Example 1
A retail chain with 40 shops deposits daily takings in local bank accounts. Every evening, the bank sweeps all balances above $5,000 into a central account. The treasurer uses the total each morning to decide whether to borrow or invest. This daily view also lets him spot a shop whose takings have fallen unexpectedly, so the sweep doubles as an early warning.
Example 2
A manufacturing group with subsidiaries in five countries uses notional pooling. The balances stay in each country, but the bank combines them to calculate interest on the net position. The group avoids moving cash across borders. The structure also saves the group the cost of moving money through foreign exchange markets when there is no need to.
Example 3
A franchise company collects royalties into regional accounts and sweeps them weekly to its head office account. The central finance team funds the payroll from that one account. It has cut its bank fees by consolidating several accounts.
Think of it
Cash concentration is gathering all your scattered money into one place where you can see and manage it.
Formula
Calculation
Amount swept = Sum of (Account balance - Target balance) for each account holding more than its target
Worked example: a company has four bank accounts holding $120,000, $85,000, $40,000 and $55,000. Each account has a target balance of $10,000.
Account 1: $120,000 - $10,000 = $110,000
Account 2: $85,000 - $10,000 = $75,000
Account 3: $40,000 - $10,000 = $30,000
Account 4: $55,000 - $10,000 = $45,000
Amount swept = $110,000 + $75,000 + $30,000 + $45,000 = $260,000.
If the company uses the $260,000 to repay a revolving credit facility costing 8% a year, it saves $260,000 x 8% = $20,800 of annual interest.Case study
Seen in the real world
Falconridge Hotels is an illustrative, fictional group with 12 hotels, each with its own bank account. At month end, five hotels held a combined $410,000 in cash, while two had overdrafts totalling $90,000. The group was also paying 9% on a $1,000,000 credit line.
The treasurer arranged daily sweeps to a central account, with each hotel keeping a $15,000 target. The pooled surplus covered the overdrafts and allowed the group to repay $250,000 of the credit line. The yearly interest saving on that repayment alone was $250,000 x 9% = $22,500.
The illustrative lesson is that idle cash in the wrong account has a real cost. Seeing every balance in one place turned scattered cash into a funding tool. The treasurer also wrote a short policy for opening new accounts, so that every new hotel account joins the sweep from day one. Within a year, the group reported its daily cash position by 9am each morning.
Watch out
Common mistakes
- Sweeping accounts down to zero and leaving no buffer, which can cause payments to bounce.
- Ignoring the legal and tax side of moving money between group companies, especially across borders.
- Assuming that notional pooling and physical concentration have the same effect, when only one moves the cash.
Questions
People also ask
What is the difference between cash concentration and cash pooling?
The terms overlap, but concentration usually means physically sweeping balances to a master account, while pooling can also include notional netting.
Who benefits from cash concentration?
Mainly companies with several bank accounts, such as groups with multiple subsidiaries or sites. Treasury teams of mid-sized businesses also gain, because one central view replaces many bank portals.
Does the bank charge for it?
Banks often charge a fee or account maintenance cost, although the savings from lower borrowing usually outweigh it.
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