What it means
A company with subsidiaries around the world often has some bank accounts with cash and others with overdrafts at the same time. Without coordination, the group pays a high rate on the overdrafts while earning a low rate on the deposits.
Pooling links the accounts so the bank looks at the combined position. There are two main forms.
In physical pooling, cash is actually moved between accounts, usually to a central account, at the end of each day; in notional pooling, the balances stay where they are and the bank simply calculates interest as if they were combined. Notional pooling avoids the cost and tax questions of moving money but depends on the bank's willingness to offset balances.
Multinational pooling adds extra layers because the accounts sit in different countries and often different currencies. Banks may offer a multicurrency pool, which converts balances into a single currency for the purpose of calculating interest.
Rules on cross-border cash movement, currency controls, tax and the treatment of intra-group lending can limit what is possible in some countries. From a finance point of view, the benefits are lower net borrowing, higher interest on idle cash, fewer bank fees and better visibility of the group's total liquidity.
The group can also reduce the amount of external borrowing it needs to hold. There are risks, including the legal exposure created when one subsidiary's balances support another's, and the need to document intra-group arrangements carefully for tax authorities.
A common nuance is that pooling does not create cash; it makes better use of cash that already exists. The treasurer still has to manage currency risk and keep enough local liquidity in each country to meet obligations.
Banks price a pooling arrangement according to the relationships and risks involved. They may charge a small fee, require guarantees between group companies, and apply limits on how far an account can go overdrawn.
A treasurer should compare these terms with the interest saved before agreeing to a structure.
In practice
Real-world examples.
Example
A food company has subsidiaries in six countries that have uneven seasonal cash flows. Treasury pools their accounts so the harvest-season cash in one country covers the overdraft in another, avoiding expensive short-term borrowing. The treasury team reviews the pool weekly during the busy season to see which countries need support.
Example
A software group in Europe and Asia sets up a notional pool with one international bank. Each subsidiary keeps control of its own account, but the group pays interest only on the net balance. The bank provides a single statement, which saves time for the group finance team.
Example
A treasurer reviewing pooling options finds that one country restricts moving cash across its borders. She leaves that subsidiary outside the physical pool and funds it through an intra-group loan documented at a market rate. She notes the reason in the treasury policy so that auditors can see why the exception exists.
Formula
Calculation
Net pooled balance = Sum of all subsidiary balances (deposits positive, overdrafts negative)
Interest benefit = Interest on pooled net balance - Net interest without pooling
Suppose four subsidiaries hold balances of +$2,000,000, -$800,000, +$500,000 and -$300,000. The net pooled balance is 2,000,000 - 800,000 + 500,000 - 300,000 = $1,400,000. Without pooling, overdrafts total $1,100,000 at 8%, which costs 1,100,000 x 0.08 = $88,000, while deposits total $2,500,000 at 2%, which earns 2,500,000 x 0.02 = $50,000, a net cost of 50,000 - 88,000 = -$38,000. With pooling, the net $1,400,000 earns 1,400,000 x 0.02 = $28,000. The annual benefit is 28,000 - (-38,000) = $66,000.Case study
Seen in the real world.
Atlas Components is an illustrative, fictional manufacturer with subsidiaries in five countries. At year end, its accounts showed combined overdrafts of $4,000,000 at an average rate of 7% and combined deposits of $6,500,000 at an average rate of 1.5%.
The treasurer introduced a multicurrency notional pool. Interest cost before pooling was 4,000,000 x 0.07 = $280,000, and interest income was 6,500,000 x 0.015 = $97,500, a net cost of $182,500. After pooling, the net balance of $2,500,000 earned at 1.5%, which gave income of $37,500.
The saving was 37,500 + 182,500 = $220,000 a year. The illustrative lesson is that simply letting the bank see the group as one customer can improve results without any change to the underlying business.
Watch out
Common mistakes.
- Assuming pooling creates extra cash, when it only reduces the interest cost of existing balances.
- Ignoring tax and legal rules in each country, which can restrict or tax cross-border cash movements.
- Pooling every subsidiary without keeping enough local cash for day-to-day needs.
Questions
People also ask.
What is the difference between physical and notional pooling?
Physical pooling moves cash to a central account, while notional pooling leaves balances in place and only offsets them for interest.
Does pooling remove currency risk?
No, a multicurrency pool simplifies interest calculations but the group is still exposed to exchange rate moves. Hedging with forward contracts or other tools is still needed if the group wants to limit that risk.
Who benefits from pooling?
The group benefits from lower net interest, and the bank benefits from a deeper relationship and more stable deposits. Tax authorities also take an interest, since they expect intra-group arrangements to be priced as independent parties would price them.
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