Treasury Today Country Profiles in association with Citi

How to introduce a cash pool in your group

Cash pools are a popular cash management tool, often enabling corporates to achieve cash savings while improving their liquidity management. However, the benefits will depend largely on the suitability of the type of cash pool to the needs of the company, as well as the success of the implementation process. In this article we look at how to establish cash pooling arrangements so that the best possible ‘fit’ is achieved and implementation is as painless as possible.

The implementation of a cash pool requires significant investment of both time and resources over the course of several months. If the implementation project is to be a success, it needs to be carefully planned and managed by the treasurer.

Preliminary research

The most crucial stage of a cash pool implementation project is the preliminary research. A thorough analysis of the entire cash flows of the group should be undertaken to ensure a full understanding of how each company works – where the cash is and how it flows into, out of and around the organisation. A full review of the current cash management operation will enable you to identify where improvements can be made and what the implementation of a cash pool will achieve. It will also help you to decide the type of cash pooling structure that will be best suited to your company:

  • Physical or notional pooling?

  • Single country or cross-border pooling?

  • How many currencies?

  • Does the facility to make local payments need to be maintained?

The implementation of a cash pool will create many legal, tax, accounting and regulatory issues. In some countries, cash pooling is either prohibited, or so tightly regulated as to be useless. You should conduct a thorough review of the rules governing cash pooling in all the countries in which you operate, making sure the you are fully aware of all legal and regulatory requirements. It will almost certainly be necessary to consult experts in the relevant fields to advise you on these rules. It is essential that you are fully aware of any potential barriers to the implementation of a cash pool at the earliest possible stage.

A thorough cost/benefit analysis of the proposed cash pool should also be performed at this stage. It is important to ensure that a cash pool will generate genuine and significant cost savings across the company before commencing the project. The major costs will be the implementation project itself and the fees the bank charges for providing pooling services. Whilst the major saving will be generated by interest optimisation, other less quantifiable savings will also be achieved by the increased centralisation of cash.

Consultants – worth the money?

Many companies employ specialist treasury consultants to guide them through major projects, such as a cash pool implementation. Consultants may be employed on an advisory basis, perhaps to give the treasurer some advice on the type of cash pooling structures available and the best way to run the project. Alternatively, a consultant may be employed to lead the cash pool implementation, managing the project from the preliminary research stages through to the final (successful) implementation. Employing a treasury consultant can be beneficial, particularly if the treasury simply does not have the resources to dedicate team members specifically to the pooling project. Consultants will provide expert, and unlike the banks, unbiased, advice, perhaps suggesting solutions that the treasurer may have been unaware of.

However, companies are often wary of employing consultants. The services of treasury consultants do not come cheaply. Many treasurers are apprehensive about the methods consultants employ, suspecting them of implementing generic solutions due to a lack of knowledge of the company. Employing an ‘outsider’ to lead such a high profile project may also create bad feeling amongst staff and generate an attitude that the cash pool is being imposed on them.

The project team

A dedicated project team should be appointed at the start of any cash pool implementation project, which is a major project requiring significant resources and time. Indeed, many companies have found that project teams need to dedicate themselves full-time to the implementation stages of a cash pooling project – if a team is unable to concentrate solely on this, the implementation will probably progress slowly. Treasurers should think carefully about how they would fill any ‘gaps’ in their team which occur as a result of the implementation project. For instance, would temporary treasury staff need to be employed for the duration of the project?

The implementation of a cash pool will involve many different areas of the company. The project team should therefore include representatives from all the relevant departments such as treasury, accounting, tax, legal, IT. Representatives from all the subsidiaries should also be included. If significant changes to the project scope, budget or timing occur during the course of the implementation, internal audit will also need to be included.

Internal support

The implementation project will only be a success if those who will be affected are committed. However, gaining widespread support can be difficult. Subsidiaries will, almost inevitably, feel threatened by a proposed cash pooling project – they will fear that they will lose control of ‘their’ cash and thus decision making ability; they may resent a change in banking partner, having worked hard to build good relationships with their current banking partner; and they will almost certainly be wary of the amount of additional work the implementation will entail.

The treasurer should take care to understand that the control of cash is an emotive subject. Staff at the subsidiaries may feel that the centralisation of balances implied by a cash pool disenfranchises them from the decision making process. The treasurer should reassure the subsidiaries that payment deadlines will continue to be met and that they will not be left short of cash. The treasurer should also explain that the subsidiaries may, in fact, benefit from the centralisation of cash. For example, short-term cash shortfalls can be funded directly from the cash pool, effectively giving subsidiaries instant access to a low cost source of funding, rather than them having to arrange expensive overdraft facilities with their bank.

“In the course of our cash pool project I have learnt that the most important thing is to convince those people working in the subsidiaries who will be affected. Often the internal problems within the group are much more critical to the success of the project than the technical implementation of the cash pool.”

Urs Müller-Ortolf, Deputy Head of Finance, ERCO

In order to gain the internal support necessary for the successful implementation of a cash pool, the treasurer should ensure that the project team consults the subsidiaries about their cash management requirements and heeds their advice. For instance, a subsidiary may need to retain the ability to make and receive local payments, such as salary payments. Consulting the subsidiaries will also help to provide a clearer picture of the most appropriate type of cash pool for your needs.

Michel Verholen, Director, International Treasury, Greif has devoted a great deal of time to establishing cash pools. Greif currently operates European and UK-domiciled cash pools and is in the process of setting up a global cash pooling arrangement with the eventual aim of pooling the cash of subsidiaries in Scandinavia, Eastern Europe, Russia, Turkey, Asia Pacific, Latin America and Africa. Michel has the following advice for Group Treasurers seeking buy-in from subsidiaries for a cash pooling project:

  • Management buy-in is crucial

    It is important that you demonstrate the net benefit of the cash pool to senior or executive management prior to approaching the subsidiaries. This analysis should incorporate as many relevant aspects as possible, including possible hurdles. It will depend on the structure of the company who this analysis should be addressed to, but in any case the audience must be in the position to appreciate the benefits, judge on possible hurdles and have the authority to persuade those subsidiaries that are not eager to jump on board.

  • Openness

    All participating subsidiaries must understand why the company wants to implement a cash pool, as well as what concessions the company wants to make to get there.

  • Choose the right banking partner

    If the cash pool implementation entails a change of transaction bank, make sure you assess the new bank’s capabilities. Areas to specifically look into are service levels, transaction pricing, float and country-specific payment methodologies, such as RiBa in Italy, cheques in France/UK, Pagares in Spain etc. These factors will impact on the subsidiaries most, so it is crucial that you are comfortable before mandating the new bank. Without any doubt, this is the element on which your subsidiaries will challenge you most.

  • Support the operations

    Listen to all the issues subsidiaries bring to the table and try to come up with a solution together. Whenever possible, try to address these issues before. This way, the subsidiaries will be more confident in the whole project.

  • Fiscal/legal issues

    Try to resolve these issues before you talk to the subsidiaries. By demonstrating that these issues have been considered and solved, you will give them greater confidence in the project. External consultants can be valuable here.

Choosing the bank

The selection of a bank (or banks if an overlay structure is chosen) to provide the cash pooling service is clearly central to the implementation project. However, the banks can only provide you with the service you ask for. It is therefore important to ensure that you have a clear idea of the required solution before you begin discussions with the banks.

To ensure that the best possible bank is selected for the cash pool project, a formal bank selection process may be undertaken. Identify a shortlist of banks who will be able to meet your requirements (ie their size and geographic spread reflects that of your own organisation) and issue them with a Request For Proposal (RFP) document, outlining your requirements. The completed RFPs can then be used as the basis for your choice of bank.

It is also worth asking the shortlisted banks if they can arrange for you to visit the treasuries of companies they provide cash pooling services to. Whilst it is unlikely that the bank will recommend a company which has experienced a less than satisfactory service from the bank, this is still a useful exercise. Visiting a treasury with a similar structure to your own can give you a valuable insight into how your own cash pool will operate.

Request For Proposal (RFP)

The RFP is the key document used to communicate a company’s business requirements to a bank and will form the basis of your discussions with banks about the proposed cash pool. The RFP should be clearly written, well structured and should contain the following information:

  • Background on the company, the nature of its business and the scope of operations.

  • Details of the company infrastructure – centralised or decentralised, the accounting and/or treasury systems used, the level of integration.

  • Current treasury and banking structure.

  • Key drivers for the cash pool project (eg a recent merger or acquisition).

  • Any planned future changes.

  • Geographic area and businesses to be included in the cash pool.

  • Summary of the solution you are looking for.

  • Details of the company’s requirements, including business objectives, preferred pooling methods, references and an overview of the basis on which a bank will be selected. The company should ask specific questions about the bank’s offering, including the bank’s pricing structure, branch network, customer service provision, training provided and terms and conditions for the required solution.

  • Contact details of key project team members.

  • Format of responses – specifying the format of the response (eg as a matrix or spreadsheet) will make the selection process easier as direct comparisons can be made.

  • The planned timetable for the project.

Implementation

The final implementation of a cash pool is a mammoth undertaking, requiring the installation and familiarisation with a number of new systems and processes across the entire company. The project team will lead this process and monitor the progress. It is important the bank provides a dedicated project manager to act as a contact between the company and the bank at this, inevitably, hectic time. The treasurer should discuss the implementation strategy with subsidiaries and the bank – will the cash pool be rolled out gradually, or will it be implemented across all the operations simultaneously?

Gradual

Many companies choose to implement cash pools gradually. Certain subsidiaries, usually the largest regions or countries, will be selected by the company to begin cash pooling. The advantage of this approach is that this initial roll-out can be treated as a pilot stage. Problems can thus be identified and resolved before full implementation is attempted.

A common cash pool implementation strategy amongst European companies is first to implement a cash pool in one currency (usually euro) before the full roll-out of multicurrency pooling. Urs Müller- Ortolf, Deputy Head of Finance, ERCO established a cross-border cash pool for the company’s European operations as part of a centralisation drive. Urs explains, “We started with a euro cash pool to exclude any currency issues and to learn how the system works, but when everything went fine, we included other currencies.”

The gradual approach to cash pool implementation can be particularly useful if you are experiencing problems persuading subsidiaries of the merits of the project. Piloting the cash pool with the companies which have been broadly supportive of the project can give it some much needed credibility amongst the other subsidiaries. By selecting the largest company/market to join the cash pool early, you also inject some momentum into the project.

Gradual implementation does however require careful management if it is not to result in an overly long implementation stage. When the inevitable teething problems arise, these may well be seized upon by any cash pool dissidents as evidence that the project should be aborted, resulting in further delays.

Big bang

This is where all aspects of the cash pool are implemented at once, across the entire company. The benefit of this approach is that a carefully structured timetable for completion can be developed, hopefully resulting in a much faster implementation time. This approach is also more likely to result in a more concerted and focused effort by the project team and all other relevant parties as a clear set of goals will have been set. This approach is however, relatively risky and will require the project team to devote itself full-time to the implementation process.

We would like to acknowledge the help of Joergen Jensen, Head of Product Marketing, TREMA, Urs Müller-Ortolf, Deputy Head of Finance, ERCO and Michel Verholen, Director, International Treasury, Greif for their assistance in the preparation of this article.

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