All companies need cash to support their business and make payments. This liquidity is an important risk mitigant, but excess liquidity can also be inefficient when seen in the context of capital that the company hasn’t deployed to invest either in the company or the yield curve.
Solutions like physical cash pooling connects accounts and corridors of activity, moving cash in between accounts to ensure treasury has cash where it needs it and when, in the right currency, and able to cover short positions or aggregate long positions. Notional cash pooling is similar but doesn’t involve physically moving cash. It creates a fungibility across currencies and provides visibility, control, and optimisation. Companies can also integrate virtual account solutions that retain the integrity of data and information on that underlying position.
Cash pooling is vital for optimising cash on account. Take a multinational with decentralised operating entities running their own businesses. These subsidiaries will keep their own cash buffers to mitigate risk and ensure they can make their payments that when added together, combine to make a significant sum across a global company. Yet not every operating company needs their buffer every day. As companies go on a journey of centralisation, they will create a fungibility in those cash buffers. It means that different entities can have a cash injection according to their needs, creating a central buffer that is optimised – and reduced – at a treasury centre.
When companies migrate from a decentralised to centralised structure, they can reduce the need to keep cash on deposit by up to 50% from simple efficiencies. Treasury can see what cash it has and where it has it, giving real-time control that allows companies to take that surplus capital and invest it to accelerate the business growth.
Of course, the cost of capital fluctuates in any given economic cycle, but companies benefit from reducing the amount of capital whatever the cycle because reducing capital is a value add. We saw a huge demand for pooling in 2020 when the business cycle changed and companies realised they would benefit from a centralised structure, with visibility and control of their cash.
Technology and digitisation are also driving pooling demand. Digitisation has led to an acceleration in e-commerce, giving way to faster payments and causing money to move much more quickly, putting pressure on liquidity management. Corporate treasury needs to know where cash is and have access to it. For example, one of the biggest challenges within cash management is short-term forecasting. It has created a need for structures that can respond and allow treasury to put cash where it is needed and in the right currency.
In another example, the evolution in e-commerce means more companies are selling third party goods and need to manage third party monies (3PM). It means these companies are an intermediary in a cash exchange. We increasingly work with companies to structure liquidity and account solutions that support 3PM which often involves safeguarding cash and requires even more visibility and control.