How does physical cash pooling & target balancing work with a TMS?
This article is written by Nomentia Cash pooling is a popular solution for balance netting to provide better access and visibility to the group’s liquidity position through a real-time, cross-border, and multi-currency structure. It can be an integral part of a group’s cash management strategy, together with target balancing to have the ability to mobilize cash across the entire group. What Is Cash Pooling? Cash pooling is a cash management method for optimizing cash balances within a group. There are two different main approaches to pooling: physical cash pooling and notional cash pooling. In this article, we focus on physical pooling. To put it simply, in physical pooling, the HQ (parent/holding) company works as a hub for collecting the excess cash from entities and distributing the cash to entities that are short on cash. Obviously, there are many different aspects that corporations should take into consideration when pooling cash, like taxes and legal obligations, which are left out of this article. In many organizations, the treasury function is in charge of cash pooling processes and agreements. Many banks provide different pooling options, but we will focus on the process where cash pooling is managed within the group. The benefits of having control of the cash pooling in-house are many. Having cash pooling functionality in the Treasury Management System (TMS) will create independence from banks, making the system bank-agnostic while covering any currency. The technical setup for physical cash pooling In the current economic environment, we have recently witnessed a considerable change in interest rates and currency fluctuations. This is one of the reasons why corporations are constantly searching for solutions to manage cross-currency and multibank cash pooling options. Additionally, corporations are interested in calculating the pooling need with intraday information instead of end-of-day balances. What is then needed for the technical setup of the cash pool? Obviously, some change management and internal communication are necessary before starting to create the technical setup for a new cash pool. Setting up cash pooling should be easy; you should be able to choose the desired balance per bank account. Furthermore, you should be able to define tolerances for the desired balance as well as payment types for the execution and the HQ’s counter account. Particularly when starting with cash pooling, the corporate treasury should have the option to start cash pooling manually, and then when the process is fully in control, they should be able to automate it. There are always different Treasury policies and practices in different corporations. Therefore, executing the actual sweeps or tops should be possible with Straight Through Processing or by using as many approvals as needed. Identifying balance transactions in bank statements should be an easy task. Cash pooling and in-house bank (IHB) Above, we discussed cash pooling and the practical setup for it. Many of you might have noticed that the “intercompany loan” between HQ and entities was not discussed in detail. In this chapter, we focus on handling that part efficiently. Imagine a situation where excess cash is swept from an entity bank account to an HQ bank account. This creates an intercompany loan. There are multiple ways to book the loan, and next, we will focus on utilizing an in-house bank for that purpose. An in-house bank typically contains one or more accounts, which we call member accounts, per participating entity. Every transaction that hits these accounts will be mirrored to the HQ mirror account. Typically, interest is calculated for the accounts, and in advanced systems, withholding tax is included when applicable. When combining in-house cash pooling and in-house banking, the obvious result would be to allocate the sweep and top transactions to an entity’s in-house bank account. This would mean that any cash pooling transactions could be found on a member account and the Treasury could automatically calculate interest for the intercompany loan as desired. One might ask: How do I allocate the pooling transaction to the entity’s member account? The answer is twofold: firstly, the TMS needs to make sure pooling payments have some individual information that the bank is reporting back and secondly, a sophisticated in-house bank system should have a dynamic way of identifying pooling transactions from potentially thousands of transactions. Target balancing for centralizing a single company’s cash in a multi-bank environment There are regions where even the smallest corporations have several bank accounts in several banks operating in just one country. The basic idea here is to have one or two main banks and the others will just provide a vehicle for collecting customer payments. In such a case, it might be interesting to sweep the extra cash from the collecting accounts to an optimized bank account owned by the same entity. This method is similar to cash pooling, but in this case, the counter account is not an HQ account but a different account owned by the same company. The arrangement, of course, also works for cross-border and cross-currencies, as no intercompany balance is created. Target balancing with an in-house bank or a hybrid approach In this blog, we have discussed how in-house cash pooling and even target balancing for a company can be done. Some corporations might even consider combining bank-offered cash pooling and in-house cash pooling in a hybrid structure. In such an arrangement, bank accounts belonging to the same cash pool are balanced by that bank and top accounts are managed by the TMS. Perhaps in the future, we will discuss how target balancing could be used in bilateral in-house bank settlement clearing or how intra-day cash forecasting could be used in physical cash pooling. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.
Franklin
The life of an interim treasurer
This article is written by Pecunia Treasury & Finance B.V. We can be “normal” treasurers: Being an interim treasurer is a bit like being a regular treasurer, but with a twist. Instead of settling into a long-term position, you’re the flexible solution, stepping in when needed due to someone leaving or falling ill. These stints typically last anywhere from three to six months, sometimes even stretching to a year. During these assignments, you become an integral part of the organization, taking on the day-to-day responsibilities until a more permanent replacement is found. However, there’s an inherent uncertainty that comes with each new assignment. You never quite know what challenges or dynamics you’ll encounter until you’re knee-deep in the role, and that unpredictability is just part of the life of being an interim manager. Or consultants: There’s another facet to this role: providing treasury support. This involves lending a hand to existing teams or individuals working on treasury-related projects. These projects can range from short-term tasks to more extensive undertakings that demand specialized attention. Often, the existing team lacks the bandwidth to tackle these projects alone, or there’s a pressing deadline looming. For instance, I once assisted a large organization in Rotterdam with delving into embedded derivatives to ensure compliance with new regulations. Within a few weeks, we had the project wrapped up, and my findings were integrated into the annual report. Another project involved constructing a RAROC (Risk-Adjusted Return On Capital) model for a client, enabling them to evaluate the profitability and risk associated with different banks and lending practices. Even implementation managers: Moreover, an interim manager in the treasury realm often wears multiple hats, extending beyond traditional financial roles. For instance, they might serve as implementation consultants for Treasury Management Systems (TMS) or payment hubs. This requires not only a deep understanding of treasury operations but also technical proficiency. Interim managers with expertise in these areas can guide organizations through the complex process of selecting, customizing, and integrating these software solutions into their existing infrastructure. By leveraging their technical skills, they ensure seamless transitions and optimal utilization of these systems, ultimately enhancing efficiency and accuracy in treasury operations. Or parttime: But the role doesn’t stop there. Sometimes, especially in smaller firms, a full-time treasurer isn’t feasible. Instead, the CFO or controller might double up on duties, handling Treasury responsibilities on a part-time basis. This is where a part-time treasurer, like myself, can step in. By taking on the treasury tasks, I free up the CFO’s time for their core responsibilities while bringing in expertise tailored to the treasury function. For instance, I once assisted a real estate company with valuing their interest rate derivative portfolio, managing their cash flow, preparing Treasury reports, and handling any ad hoc issues. All this was accomplished within eight hours a week, allowing the company to benefit from specialized expertise without the need for a full-time hire. Or we do a Treasury or FX scan: If you’re unsure whether your company’s treasury practices are optimal, a treasury scan or FX scan could be the answer. This involves conducting a thorough evaluation of the existing Treasury & FX processes and practices, identifying potential areas for improvement. A quick and dirty scan can be completed in just one day if the necessary data is provided in advance. While there’s a cost associated with the scan, it’s often outweighed by the savings generated from implementing the identified improvements. Plus, these savings can be realized either by the company itself or through continued collaboration with a flexible treasurer like myself. For more information about the scan or if you are in need of an interim manager in Treasury, please contact Pecunia. Also Read Join our Treasury Community Treasury Masterminds is a community of professionals working in treasury management or those interested in learning more about various topics related to treasury management, including cash management, foreign exchange management, and payments. To register and connect with Treasury professionals, click [HERE] or fill out the form below to get more information. Notice: JavaScript is required for this content.