STEP 9, Consider Zero Balancing of Account

Increase company liquidity, improve interest result and reduce external debts.

The primary target of each cash pooling is the optimization and use of funds of all companies in the company in order to reduce external debts and increase the working capital (cash pool). Furthermore, especially interest benefits in multiple ways can be achieved for the pool participants on the payable and on the receivable side.

The zero balancing, also called cash concentration or sweeping, is in this form the easiest way to introduce cash pooling. Depending on a surplus or lack of cash, all cash balances in the pool (pool participants) will be transferred on a daily basis automatically to or from the top mother account (pool leader). A major positive effect is a shorter balance and therefore the key figure of the debt ratio is improved. But there are also some disadvantages, e.g. liability questions in case of a short fall of the pool leader. Also there is more administrative work since all intercompany cash flows on a daily level have to be booked at the pool leader. However, this process can be automated and structured on a daily basis.

Please visit AMC-Banking for details.

Process/functionality of a zero or target cash pool pooling accounts of the participants can be regulated in two ways, both fully automatical, a) zero balancing: all participating accounts, except the head account, are set to 0 (zero) at the end of a day; surplus balances are debited, minus balances are credited to/from the head account, and b) target balancing: basically the same procedure as zero balancing, just with a number of extended parameters regarding the end of the day balance. For example every day a predefined balance remains on the account, which may be for instance used for lease guarantee etc. Because of technical restrictions all transfers can be booked at the following day, but will always be executed with the correct value date.

In the following there is an example of how the communications for the transfer of balances may happen by using AMC-Banking. Depending on the executing banks some differences can be the case. It is also often the case that the cash pool cannot be managed by only one bank, because the main bank does not have a branch in every country. This is commonly the case in cross border pools, see below. That means a third bank must be included in the pool network. This example is certainly strongly simplified und contains for instance no internal connections which are mandatory in the accounting of the pool leader.

This is an example of how the communications for the transfer of balances may happen by using AMC-Banking. Depending on the executing bank some differences can be the case. It is also often the case that the cash pool cannot be managed by only one bank, because the main bank does not have a branch in every country. This is commonly the case in cross border.

Reasons for Cash Pooling:

  1. Optimal allocation of internal liquid funds and max. reduction of external debts
  2. Reduction of financing costs on group level
  3. Improvement of investment return due to economies of scale
  4. Simplification of liquidity management on local level
  5. Reduction of external banking costs due to centralization
  6. Optimization of cash flow forecast