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Cash pooling is a financial management strategy that allows companies to maximize both their current credit and debit positions so that the corporation receives the most benefit from those positions. In addition, it can help the company to avoid a number of costly bank fees, as well as help reduce the opportunity of damaging the reputation of the corporation because of negative balances on an bank account. In effect, this strategy helps the make the most of the resources that are available.
There are a few different approaches to cash pooling that will aid in cash management for both small and large companies. One basic approach involves the application of a cash management technique known as notional cash pooling. This involves transferring sufficient funds into one of the company's more active bank accounts to maintain a balance that will preclude the expenses of monthly finance charges or insufficient funds charges. From this perspective, the company achieves a higher net profit by eliminating unnecessary expenses.
Another approach is the concentration of cash into one central account. With cash concentration, the company maintains enough money in an account to not only avoid incurring bank fees, but also to generate some interest income from the balance. Many small businesses choose to pay all expenses from one checking account that is designated as an operations account. Maintaining a minimum balance above and beyond the usual operating expenses helps to ensure that at least some interest is earned on the operations account every month.
Cash pooling can often help to streamline the financial operations of a business, making it easier to keep up with cash flow. By using this strategy to avoid expenses that are not essential to the operation of the business, and maybe even create a small additional revenue stream through accrued interest, a corporation can build sufficient cash assets. These assets can be drawn upon when a downturn in the economy affects sales, allowing the company a chance to weather the depressed market. Once the market begins to swing upward and the demand for the company’s products return, the process can be used to replenish resources that were depleted during the downturn.