Best cash pooling practices, techniques, and strategies

How to manage cash and liquidity across global subsidiaries with cash pooling? 

To centralize or localize – that is the question. Whether 'tis nobler in the mind to consolidate resources for efficiency and control, or to distribute them for flexibility and responsiveness, each approach has its merits and challenges. 

Which strategy are you leaning towards for your organization? 

Would you like to optimize liquidity by centralizing its cash resources? Ensure that surplus funds from one part of the organization can be used to cover deficits in another or consolidate cash balances to negotiate better interest rates and reduce banking fees. Perhaps you're interested in maximizing interest income on surplus funds or just wishing to provide a clearer, real-time view of the company’s cash position.  

To get to the bottom of questions regarding global cash position, liquidity optimization, risk reductions, and bank cost minimization, you must consider cash pooling. How fortunate that I was to be able to ask Nomentia’s top expert and get some answers about the best cash pooling practices, techniques, and strategies. 

Meet Jouni Kirjola

Jouni Kirjola is the Head of Solutions and Presales at Nomentia, bringing nearly 20 years of expertise to the role. Specializing in payments, cash forecasting, in-house banking, and reconciliation, his extensive experience and deep knowledge of financial solutions make him a key expert in delivering tailored solutions.

What is cash pooling: Purpose and benefits 

So, what is the purpose of cash pooling, and how can it benefit multinational corporations? 

Cash pooling is a treasury management technique where a company’s subsidiaries consolidate their cash balances to optimize group-wide liquidity and reduce dependency on external borrowing. This allows organizations to make efficient use of excess funds from subsidiaries with surplus cash to cover the needs of those with shortfalls. 

As Jouni Kirjola puts it: “The primary objective of cash pooling is to enhance cash utilization across a group of companies and ensure that resources are allocated where they’re needed most, without incurring high borrowing costs. By consolidating funds, cash pooling offers several advantages, like reducing interest expenses, improving visibility and control over cash flows, and minimizing currency exchange exposure in multinational operations.” 

Benefits of cash pooling 

• Improved liquidity management: For example: A multinational corporation with subsidiaries in the US, UK, and Germany has surplus cash in its US entity but a deficit in its UK subsidiary. By implementing a cash pooling structure, funds from the US entity can be transferred to the UK subsidiary to cover the shortfall, ensuring that the group as a whole has sufficient liquidity without needing to rely on external funding. 
• Reduced short-term debt: The same multinational company may typically borrow money at high interest rates to cover short-term cash flow gaps in its subsidiaries. With centralized cash pooling, the group can use the surplus cash from one subsidiary to cover deficits in others, reducing the need for costly short-term loans. 
• Cost savings: If each subsidiary operates its own bank account, it might face individual transaction fees, maintenance charges, and foreign exchange fees. By centralizing cash into a pooled account, the company can negotiate lower fees with banks, thanks to larger transaction volumes, and eliminate redundant banking services across subsidiaries. 
• Enhanced visibility and control: A company with subsidiaries in multiple countries may struggle to track cash flows across all regions. By implementing cash pooling, treasury managers get a consolidated view of the group’s total cash position. This centralized view allows for more informed decision-making, like adjusting payment schedules or reallocating funds more efficiently, and enables more accurate cash flow forecasting. 
• Increased interest income: Suppose the company's European subsidiary has a surplus of €1 million, while its Australian subsidiary has a €500,000 deficit. Instead of keeping the surplus funds idle in the European account, cash pooling allows the group to combine the balances, maximizing the total available pool. With larger pooled funds, the company can earn higher interest rates on the total balance. 
• Flexibility and efficiency: A company with subsidiaries in several countries might need to make a payment in one currency while another subsidiary holds that currency. With cash pooling, the company can easily transfer funds between entities, enabling quick payments without needing to open a new currency-specific account or rely on expensive foreign exchange transactions. This improves operational efficiency by reducing the complexity of managing multiple currency accounts. 

Types of cash pooling

What are the different types of cash pooling, and how do they differ in terms of structure and advantages?

1. Physical Pooling: Physical cash pooling consolidates funds from multiple accounts into a single master account, typically through daily transfers, providing centralized access to liquidity for efficient allocation. 
   • ZBA (Zero-Balance Account): Each subsidiary has its own account, but the balance is swept daily into the master account, ensuring efficient liquidity management by zeroing out the subsidiary accounts. 
   • TBA (Target Balance Account): Subsidiaries maintain a target balance, with transfers made to achieve the target by the end of the day. This keeps operational balances intact while centralizing excess funds. 
   • FBA (Fixed Balance Account): Subsidiaries maintain a fixed minimum balance, with excess funds transferred to the master account and shortfalls covered by the parent company, balancing operational needs and centralized liquidity. 
2. Notional Pooling: Balances are virtually pooled without actual fund transfers, allowing positive and negative balances to offset, optimizing net interest without moving funds. 
3. Hybrid Pooling: Combines physical and notional pooling, offering flexibility by allowing both actual transfers and virtual offsetting to balance liquidity and interest optimization. 

Best cash pooling practices to consider 

"Cash pooling is a valuable strategy for corporations aiming to optimize liquidity across a group of subsidiaries. To maximize its benefits, companies should focus on structuring pooling arrangements to fit specific business needs, streamline banking and operational processes, closely monitor pool performance, leverage automation, and ensure regulatory compliance." — Jouni Kirjola, Head of Solutions & Presales 

What, then, are the best practices for effectively managing cash pooling, and how can these improve operational efficiency? 

1. Optimize cash pool structure for business needs: Choosing the right pooling structure— physical pooling, notional pooling, or a hybrid cash pooling arrangements—is essential for aligning with a company’s cash flow requirements and risk profile. The question is, how can you optimize your cash pool structure to best align with your company's liquidity needs and risk profile? In physical pooling, cash is physically transferred into a central account, which works well for companies with frequent cash surpluses and deficits among subsidiaries. Notional pooling, on the other hand, enables cash balance offsetting without actual transfers, which can be advantageous for companies operating in multiple currencies and looking to minimize FX costs. Businesses should assess cash flow patterns, regulatory considerations, and tax implications before selecting a structure. Establishing a pool that balances the company’s liquidity needs while respecting jurisdictional limits helps avoid over-complexity and regulatory pitfalls.
2. Standardize bank accounts and processes: If you’re asking why it is important to standardize bank accounts and processes when implementing a cash pooling strategy, the answer is rather straightforward: A simplified banking structure supports efficient cash pooling by minimizing the number of accounts and banks involved. Standardizing account setups, payment formats, and transaction processes across subsidiaries ensures that all entities operate within a uniform framework. For multinational corporations working with various regional banks, this can be particularly helpful, as it simplifies daily cash concentration and liquidity monitoring. 
3. Regular review of pooling performance: Regularly evaluating pooling performance using key performance indicators (KPIs) and metrics is crucial to identify areas for improvement. KPIs may include intercompany loan balances, daily cash levels, interest savings, and FX risk metrics. By monitoring these indicators, treasury teams can detect trends, assess pool effectiveness, and adjust the structure or terms of intercompany lending as necessary. For example, tracking intercompany loan balances can reveal opportunities to optimize interest rate settings and cash deployment and ensure that the pool remains cost-effective and aligned with overall financial goals. 
4. Automate pooling and integrate with cash and treasury management systems: Automating cash pooling through cash and treasury management systems minimizes manual work, enhances accuracy, and ensures timely cash transfers or position adjustments. System integration allows for real-time visibility into cash positions across all subsidiaries and automates processes like interest calculations, FX management, and intercompany settlements. Automation is particularly valuable for multinational corporations with high transaction volumes, as it reduces the need for manual intervention, mitigates operational risk, and ensures that pooling adjustments align with actual cash needs. 
5. Manage regulatory and compliance requirements: Compliance with tax, legal, and regulatory frameworks is critical for effective cash pooling. Organizations should ensure that pooling arrangements comply with local and international tax laws, which may require specific documentation for intercompany loans and transfer pricing policies. Transfer pricing must be aligned with local regulations to avoid tax penalties, and companies may also need to meet documentation requirements for cross-border transactions. Managing regulatory compliance is crucial to avoiding fines and maintaining pooling efficiency across jurisdictions. 

Cash pooling efficiency techniques 

Enhancing cash pooling efficiency is crucial for corporations that manage diverse subsidiaries with varying liquidity needs.  

“Optimized pooling techniques, like cash concentration, netting, and interest rate optimization, play a vital role in maximizing the benefits of cash pooling and ensuring that internal funds are utilized effectively.” - Jouni Kirjola, Head of Solutions & Presales

Cash concentration techniques 

• Zero-balancing is a common cash concentration technique that centralizes excess funds from various accounts. Under zero-balancing, a company clears each subsidiary's account at the end of each business day, transferring any surplus cash to a central, master account. This method ensures that all funds are gathered in one place, enabling the parent company to use them for various strategic purposes, like reducing debt or financing other subsidiaries. Zero-balancing is particularly effective for multinational corporations, as it reduces the need for external borrowing and helps keep interest expenses low by using internal funds more efficiently. 
• Multi-currency pooling is another powerful technique for global operations, as it consolidates cash positions across different currencies without requiring daily currency conversions. This pooling method allows a company to manage multiple currencies in a single structure, maintaining separate currency accounts that are then netted together. By pooling funds in different currencies, a corporation can limit the impact of currency exchange fees and FX risks. For example, if a European subsidiary has excess euros while a US subsidiary needs dollars, multi-currency pooling lets these subsidiaries manage their cash requirements locally, avoiding the need to frequently convert funds across currencies. 

Netting is an efficient technique for managing intercompany transactions by offsetting receivables and payables between subsidiaries. Rather than processing multiple payments across borders, netting allows a company to settle balances internally, reducing the number of transactions and lowering associated fees. 

“Through netting, corporations can centralize all intercompany payments, matching them at the group level and then settling the netted balance. This process not only simplifies the transaction process but also significantly reduces FX exposure, since fewer cross-border payments need to be made.” - Jouni Kirjola, Head of Solutions & Presales 

For instance, if a subsidiary in Canada owes funds to a subsidiary in Germany, while the German subsidiary also owes the Canadian one, these transactions can be netted, with only the balance remaining after offsetting payments. This streamlined approach minimizes FX risks and administrative costs, making it ideal for companies operating in multiple jurisdictions. 

Interest rate optimization and internal funding 

An additional advantage of cash pooling lies in the ability to optimize interest rates through internal funding. By leveraging the pooled funds, a company can create an internal lending structure that benefits subsidiaries in need of financing while reducing the need to turn to external lenders. 

For example, if one subsidiary has surplus cash and another has a short-term funding requirement, the company can issue an intra-company loan at a competitive internal rate rather than incurring higher borrowing costs from external banks. This approach allows companies to manage funding needs within the organization, lowering overall interest expenses and creating more favorable terms for subsidiaries. In this scenario, a subsidiary in Japan with surplus cash could lend funds to a subsidiary in Brazil facing a temporary liquidity shortage, help the Brazilian subsidiary avoid high local borrowing rates, and enhance group cash utilization. 

“By implementing internal funding and interest rate optimization within a cash pooling structure, companies can maximize the use of internal resources, minimizing the cost of borrowing externally.” - Jouni Kirjola, Head of Solutions & Presales 

Strategic approaches to cash pooling for multinational corporations 

With varied subsidiaries and currencies, multinational corporations need a sophisticated approach to cash pooling that incorporates currency, tax, and corporate finance considerations.  

Cross-border cash pooling and FX considerations 

In global cash pooling, managing foreign exchange (FX) risk is crucial due to the different currencies that subsidiaries operate in. Without a careful FX strategy, currency fluctuations can result in significant conversion costs and impact the company’s bottom line. To mitigate these risks, multinational corporations adopt specific FX strategies within their cross-border cash pooling structures. 

1. Consolidating major currencies: One effective FX strategy is to consolidate cash holdings in a few major currencies, like USD, EUR, or JPY, instead of managing numerous smaller currency pools. By focusing on key currencies, companies can reduce the frequency and volume of currency conversions. This not only lowers transaction costs but also simplifies FX management and improves overall cash visibility. 
2. Using forward contracts: To protect against FX volatility, multinational corporations often employ forward contracts, which lock in exchange rates for future transactions. By securing predictable rates, treasury teams can manage future cash flows with more certainty, minimizing potential losses from currency fluctuations. For example, if a European subsidiary anticipates needing USD in six months, a forward contract allows the company to secure an exchange rate today, stabilizing future costs and supporting accurate financial planning. 
3. Centralized pooling to offset currency flows: Centralizing cash pooling across the organization enables companies to offset currency flows naturally, reducing the need for frequent conversions. For instance, a UK subsidiary that generates excess GBP can offset the dollar needs of a US subsidiary within the pool, avoiding the necessity to convert funds externally. By aligning currency inflows and outflows across subsidiaries, centralized pooling reduces FX risk and optimizes internal currency usage. 

Tax optimization and transfer pricing 

Tax efficiency is a major factor in cash pooling, especially as multinational corporations aim to comply with local tax regulations while maximizing after-tax returns. Transfer pricing and tax-optimized pooling locations play key roles in ensuring that intercompany cash transfers align with regulatory standards and corporate financial goals. 

1. Transfer pricing policies: When subsidiaries lend or borrow within the cash pool, it’s critical to set transfer pricing policies that are consistent with market standards and tax regulations. This involves establishing interest rates for intercompany loans that are within a range that would be offered by external lenders. Aligning intercompany loan rates with tax regulations reduces the risk of tax penalties and ensures compliance across jurisdictions. For instance, a subsidiary in a low-tax jurisdiction lending to one in a high-tax area must set a fair, arm’s length interest rate that avoids undue tax advantages, maintaining compliance with tax authorities. 
2. Tax-efficient structuring in favorable jurisdictions: Multinational corporations often establish cash pools in tax-favorable jurisdictions, which can lower the tax burden on pooled funds and reduce withholding taxes on intercompany transactions. By pooling in countries with favorable tax treaties or incentives, companies can optimize their tax exposure while maintaining efficient cash management. For instance, some companies choose to locate their cash pools in countries like Ireland or the Netherlands due to favorable corporate tax policies and extensive tax treaties with other nations. 

Integrating cash pooling with corporate finance strategy 

“Beyond liquidity management, cash pooling also serves as a tool to achieve broader corporate finance objectives. By aligning cash pooling with the company’s financial goals, companies can use pooled funds strategically, supporting balance sheet management, capital investments, and debt reduction.” - Jouni Kirjola, Head of Solutions & Presales 

1. Supporting balance sheet management: Cash pooling offers centralized visibility and control over corporate liquidity, enabling treasury teams to manage the balance sheet more effectively. With access to group-wide cash data, companies can make informed decisions about managing liabilities, investing in capital projects, or adjusting debt levels to improve financial ratios. For instance, a company aiming to reduce its debt-to-equity ratio can use cash pools to allocate surplus cash for debt repayment, enhancing balance sheet strength and creditworthiness. 
2. Funding capital investments: Pooled funds provide a readily available source of capital for internal investments or acquisitions, helping companies minimize reliance on external financing. By using internal cash to fund strategic projects, companies can lower interest expenses and invest in long-term growth without raising additional debt. This approach is especially beneficial for companies seeking to maintain control over capital spending and minimize exposure to interest rate fluctuations in the credit market. 
3. Reducing external borrowing costs: With efficient cash pooling, multinationals can significantly reduce their reliance on external loans. Surplus funds from one subsidiary can be used to meet another’s short-term funding needs, minimizing the need to draw on external credit lines. Additionally, companies can issue intra-company loans at competitive interest rates, saving costs on external interest expenses and improving cash utilization across the group. For example, a U.S.-based subsidiary with surplus funds can lend to a European subsidiary with a short-term cash requirement, reducing the need for the European entity to borrow from local banks at higher rates. 

Cash pooling implementation challenges and risk management 

Implementing cash pooling in multinational corporations presents operational and technical challenges that require careful planning and risk management.  

“One major challenge is system compatibility—integrating different ERPs, financial systems, and treasury management systems across subsidiaries can be complex, especially when they are not designed for seamless data sharing. To address this, companies often adopt phased implementations, starting with a few key subsidiaries before scaling up, allowing for adjustments and minimizing disruptions.” - Jouni Kirjola, Head of Solutions & Presales 

Additionally, banking limitations—like restrictions on cross-border transfers or limited services in specific regions—can hinder pooling efforts. Selecting banking partners with global reach and experience in cash pooling is essential for overcoming these constraints.  

Effective risk management in cash pooling focuses on mitigating credit, regulatory, and liquidity risks. Credit risk arises when subsidiaries with weak credit rely heavily on the pool, potentially straining liquidity. Establishing clear credit limits and backup credit facilities can prevent imbalances and ensure that funds are available as needed. Regulatory risk is another concern, as cash pooling must comply with local financial and tax regulations, which vary widely. Regular audits and collaboration with legal advisors help ensure that pooling arrangements adhere to all jurisdictional requirements. 

Conclusion: Best cash pooling practices, strategies, and techniques

Centralized cash pooling offers significant advantages for multinational corporations by optimizing liquidity, reducing borrowing costs, and enhancing cash flow control. By implementing best practices such as selecting the right pool structure, automating processes, and integrating with treasury systems, companies can streamline their cash management operations. Techniques like cash concentration, netting, and interest rate optimization further improve efficiency, while strategies for managing foreign exchange risk and tax optimization help minimize costs. Despite implementation challenges, a well-executed centralized cash pool can align with broader financial goals, providing companies with greater financial flexibility and strategic advantage in managing global cash resources.