Cash pooling consolidates cash and securities into a central account to maximize assets and reduce costs. Evaluate current arrangements, identify benefits and liabilities, and consider different scenarios before deciding on the best cash pooling strategy.
Cash pooling is a financial management strategy that companies sometimes use as a means of consolidating cash and other securities into a sort of central account or economic funnel, maximizing the ability to make the most of those assets. At the same time, this approach can also help reduce costs associated with such activities, including various types of fees and commissions. When considering a cash pooling strategy, it’s important to properly evaluate how consolidation will benefit the business, what potential liabilities might arise, and ultimately whether the approach is worth the time and effort.
A simple tip for considering setting up a cash pooling approach is to take a good look at the way assets are currently organized. Identify the benefits of this current arrangement, in terms of ease of access to those interests, any interest or returns that are earned from those assets, and generally what benefits you will get from such an arrangement. Also consider any costs or liabilities that arise with your current situation. The goal is to understand exactly what is achieved with the current arrangement and what could be restructured to minimize costs and increase returns.
Once you’ve identified the pros and cons of your current financial strategy, consider options for consolidating those businesses into one or two cash pools. The idea here is to determine which of the assets could easily be placed in a pool and more benefits than before, without triggering any additional expenses or liabilities. This part of the process will often require developing several different scenarios for the pool, then projecting the outcome of implementing each. The projections can be used as a comparison to the current asset disposition and decide whether that particular cash pooling strategy is in the best interests of the company.
Since the general idea of cash pooling is to rearrange activities for the best, different pool configurations may need to be considered in order to truly determine what should and should not be done. It is very possible that the approach of using a central account at one institution will not produce desirable results, while working with another institution would produce much more attractive results. Don’t assume that if one model with one institution isn’t viable, working with a different bank or other institution won’t work. Instead, methodically consider several different scenarios before deciding whether and how to structure the cash pool, and in the end the assets can be positioned in the best possible way.
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