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Cash Pooling Systems

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The review of literature is comprised of three main areas which describes cash management in multinational companies. First, literature in pooling structure is analyzed in detail. The next section of the literature focuses on the advantages and disadvantage of cash management in conglomerates. In the following section the literature discuss about the implications of centralization of cash management in multinational companies. Finally, the literature concludes by discussing the best possible cash management structure to the ACTIVAS Group of company.


The main objective of the ACIVAS Group of company is to implement effective cash pooling structure for the following purpose; to have an enhanced control over cash, to remove the inactive cash, to lessen the banking cost and to simplify the banking relationship, to automate cash management and to regulate the cash pooling procedure.

The flowing literature would discuss three main areas which describes cash management in multinational companies.


Effective cash management is a pivotal function for any multinational companies. Managing cash for any multinational companies is a significant task. To enforce better cash management process in any multinational organisation especially in ACTAVIS GROUPS of Company will naturally require a foolproof cash management technique. Little empirical evidence is available in describing the cash management techniques. However, few researchers have examined varied theoretical model of cash management, this paper focus on the relevant model which would be applicable to our study.


ACTIVAS Group of Company requires an effective cash pooling structure to generate extra cash for the profitability of the company. To explain how implementation of cash pooling (target pooling) in multinational companies adds benefit to the company, Soenen and Sun 1995 has explained the benefits of implementation of global cash management in Chinese multinational national company.

As cash pooling happens at inter-company level, financing happens from superfluous company to the company where cash insufficiency prevails. The researchers in this research attempt to explain the approach which would diminish the total interest to be paid to the third party i.e. to the parties outside the group company. In addition, the companies in the surplus pool circle will receive higher interest from the deficit pool companies. As shown in the target pooling the companies in the pool group will have separate account for their company, though all the arrangements are legally formalized for these companies.

Target pooling also seems to be beneficial to multinational companies in the following way, it provides improved financial accounts when considered as whole, also the total cost of the pooling for the sub-account is considerably low when compared to the individual account, the offset debit balances also reduces the level of indebtedness recorded in the group’s balance sheet, the process also minimize the management cost and simplify the management process and finally target pooling offers central credit line only on central account.

However, certain disadvantages are also been noted when considering target pooling. They include calculating and booking the interest on inter-company loans generated by target balancing, booking of all inter company entries, in addition target balancing reduces the autonomy of sub-account management.

In another study Gassman & Golodny has reviewed the performance of notional pooling. The following table shown is Standalone Transaction for an Accounting firm Gassman & Golodny LLP in New York which adopted Notional pooling system. This explains the pooling benefit to the pool members (reduction of cash to the third parties).

  Standalone Transaction for Group Company Cash Pooling Pooling Benefit




Company C Total Account Balance
Balance $600 $600 ($700) $500 $400
Interest rate 5% 5% (7%) 5%
Interest $30 $30 $47 $5 $20 $15

The total of amount received by pool companies as interest was $5. However, the interest received was increased to $15 by the pooling effect were the superfluous funds and the deficit funds was compensated between the group companies. This was done by balancing the surplus fund of $1200 from the company A & B with the deficit fund of ($700) from Company C. This blocked bank interest spread of 2% ($7-$5) (i.e. $15) to outside companies. From the above study it is very clear that cash management from the pooling companies would yield more advantage in regards to credit rating as a whole, which in turn would be more favorable to access bank loans and rise finance from market.

Apart from this Notional pooling structure add value to the firm as group companies in this structure move their account balances to central account or individual account with all legal formalities on a cyclic basis. In addition, notional pooling seems to be more advantageous in the following ways. It eliminates all inter company loans and internal managerial cost, lowers the bank charges when compared to target pooling, accounts in currencies both within and outside the monetary union are included in the same pool, also in notional pooling as all the bank account are kept separate autonomy of management of accounts is maintained, in addition the decision to choose for notional pooling which involves no cost to the company is revocable.

However, in notional pooling structure there will be greater use of credit lines when compared to target balancing as each account may possibly show a debit balance and be required to have an adequate credit line. On the other hand, when considering the tax related issues application of notional pooling would be highly beneficial than target balancing, because notional pooling is more flexible to the Thin-Capitalization rules and Transfer Pricing Rules, but in target pooling Thin-Capitalization rules, Transfer Pricing Rules and Stamp Duty are applicable to subsidiaries based on their performance and country wise exemption.

In addition, the Dutch corporate sectors on implementation of notional pooling showed improved treasury management and increased economy in the treasury operations by limiting the credit standing of all group companies to one single financial institution which obtained additional favorable loans to the company. (Tse, Buckely, and Westerman, 1998). The survey results stated that cash management activities in the Dutch companies fetched discount in banking charges, also volatility of liquid cash in the group company was managed and controlled in regular basis.

The survey results from construction industry which supported the above study indicated that 80% respondents reported that use of notional pooling minimize the balance in non-interest accounts. Further 65% respondents reported that they used online banking for effective cash management. The survey results also suggested that implementation of latest techniques like notional pooling and online banking in conglomerates has yielded better results in managing cash (Carlson, 2003). From the literature analyzed it is clear that cash pooling structure such as notional pooling when compared to target pooling is beneficial to companies.


Merging of companies in international level would possibly reduce the total risk to companies. (Markowitz, 1952). Further, shareholders could expand their portfolio by themselves to any company, which is part of the mergers without needing any help from the company. However, merging would not be beneficial in value to the shareholders. Many studies have been performed to identify the position of the shareholder in a multinational company and have come out with the results stating that during merging only the targeted firm receives increased value to the shareholders.

In last decade, when resources were scarce merging was beneficial to the multinational companies as it benefits the participating company when the cash operations were centralised to the headquarters of the company (Baker, 1992). In addition, resources such as finance, managerial expertise, law pertaining to taxes and other juridical restrictions regarding transactions and lending are scarce the merging company enjoy the benefits than the non-merging companies. However, the individual firms are able to afford knowledge resource to their companies equal to that of amalgamated companies, as the knowledge availability has grown tremendously after emergence of many business schools. (Kenyon, A. 1992).

Despite the fact that individual companies can perform better than the multinational companies, many companies opt for merging because the internal financing and reallocation of money across the multinational companies are more advantageous in the time of bankruptcy or solvency. Conglomerates headquarter performs better than the outside bank in identifying a profitable investment opportunities and thus conglomerates adds value to the merged companies. (Stein, 1997). However, this is been disproved in another study (Shin and Stulz, 1996) which state that multinational companies fail to invest more funds to the divisions with better investment opportunity.

Diversified firms liable to trade at a discount in contrast to the non-diversified firms and that the discount is positively related to the extent of investment misallocation and the diversity of the investment opportunities across divisions. (Mudambi, 1999 and Rajan, Servaes and Zingales, 2000).

In particular, when headquarters has restricted control, resources may be allocated to the wrong investment projects. (Rajan, Servaes and Zingales, 2000). Similarly when a headquarter permit more control to subsidiaries, the performance of the domestic capital market will be hindered. (Mudambi, 1999). Corporations with unrelated diversification encounter more problems in internal financing, than the companies associated in the same line of business. (Khanna and Tice, 2001). However, in spite of disadvantages merging in case of related firms seems to be beneficial


In different studies performed by Kenyon et. al., 1992; Brown, 1997; Miles, 1997 in identifying the performance of multinational companies with centralised cash management, has come out with the results projecting the advantage of using centralised cash management in conglomerates. The results states that, centralisation provides economies of scale and negotiating power.

Further, it also reduces the cash balance, cash flow and risk exposures thus providing reduced financial cost. In addition, tracking of the inter company procedures and cash flow becomes easier, also banking charges and associated cost are reduced. Moreover, decision making related to investments becomes easier and provides more advantage (Van Alphen, 1998). Cash management techniques like netting and pooling provide more advantage to conglomerates with centralised cash management. (Peters, 1999).


As an efficient cash pooling structure will be able to add considerable value to a corporate, ACTIVAS Group should initiate to introduce cash pooling structure to its company to obtain the maximum results. Implementation of notional pooling in ACTIVAS Group Companies and connecting those to a centralized bank will make available an easy access to the bank loans, reduces the internal management cost and the bank charges, independence of management of accounts in notional pooling is maintained, also accounts in different currencies from different subsidiaries can be included to the same pool.

In addition, application of notional pooling would waive the tax problem present at different subsidiaries. Similarly, centralization of cash pooling system throughout the group companies would standardize the rules in all the subsidiaries thereby enabling transparency throughout the system, volatility of liquid cash in the group company could be managed and controlled in regular basis. The treasury which acts as a central body will have complete knowledge about all the operating subsidiaries, thus it would be in a position to frame rules for the group companies and ensures that they are adhered too.  In addition, centralization of cash pool in ACTIVAS Group Companies would reduce the rate of interest to the third party.



Cash pooling system in general, would be more effective for multinational companies because it simplifies the procedures of banking and yields more advantage in regards to credit rating as a whole, which in turn would be more favorable to access bank loans and rise finance from market. Apart from this pooling provide reduction of taxes on interest thus reducing the cash deficit from the company. As cash pooling has broader advantage, implementation of the same in multinational company would provide more benefit to the group companies in yielding more cash and reducing the effect of risk taken.




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Brown, R.A. (1997) The Case for Regional Treasury Centers, Treasury Management International, issue 55, September 36-39.

Burch T.R, V. Nanda & M.P. Narayanan. (2000). Industry Structure and the Conglomerate “Discount”: Theory and Evidence, University of Michigan Business School, Working Paper 00-018, August.

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Hugo Mann, (2003) Driving to Success in Cash Management, BMW Group, Germany.

Kenyon, A. et al. (1992) Centralisation Vs Decentralisation, The Treasurer, February, 5-24.

Khanna, N. & S. Tice. (2001) The Bright Side of Internal Capital Markets, The Journal of Finance, vol. 56, No.4, August, 1489-1528.

Markowitz, H. (1952) Portfolio Selection, Journal of Finance, 7, March, 77-91.

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Peters, M. (1999) Cash management in euroland, London.

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Soenen and Aggarwal, (1989). Cash and Foreign Exchange Management, Theory and Corporate Practice in UK, Journal of Business Finance and Accounting, 16, Winter, 599-619.

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Srinivasan, V. (1974). A transshipment model for cash management decisions management science, 20:10, 1350-1363.

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Tse, K.L. & W. Westerman (1997). Euro cash ‘94: Pan-European Cash Management in the Netherlands, W.Mvanden Bergh et al, (1997). Financiering en Belegging Rotterdam, Erasmus University, 198-227.

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