Advantages of Zero Balance Cash Pooling

One of the biggest advantages of Zero Balance Cash Pooling is the high level of clarity what the cash positions of participating subsidiaries, as well as where the money is. After all, the cash of participating bank accounts sits physically in the central account of Treasury (or the Holding). This is clear, straight forward and clean.

Next to that, it is clear what the intercompany balance sheet positions of the participating subsidiaries are, as the central Treasury maintains a ledger of In-House Bank balances where all the sweeps are being recorded.

Balance Sheet Entries for Incoming and Outgoing Sweeps

An incoming sweep at the central Treasury is a debit entry on the balance sheet of the central Treasury (cash in the bank account) and a credit entry on the balance sheet of the subsidiary (cash out of the bank account). But at the same time, this incoming sweep is a liability of the central Treasury to a subsidiary; this liability is a credit entry on the balance sheet of the Treasury and a debit entry on the balance sheet of the participating subsidiary (by means of an In-House Bank account, or an intercompany current account loan).

Vice versa, an outgoing sweep from the central Treasury is a credit entry on the balance sheet of the central Treasury (cash out of the bank account) and a debit entry on the balance sheet of the subsidiary (cash in the bank account). But at the same time, this outgoing sweep is an asset from the Central Treasury to the subsidiary; this asset is a debit entry on the balance sheet of the central Treasury, and a subsidiary’s liability to the treasury is a credit entry on the balance sheet of a subsidiary (by means of an In-House Bank account, or an intercompany current account loan). For fiscal booking purposes, the In-House Bank accounts are not recorded as “In-House bank accounts”, but as intercompany current account loans.

Comparing Zero Balance Cash Pooling and Notional Cash Pooling

If a Notional Cash Pool had been applied, it would have been less clear what the exact balance sheet position is of each participating subsidiary because of the bank’s right of setoff. Admittedly, in a Notional Cash Pool, it is clear what the external bank balances are (as they are not touched when using a Notional Cash Pool). But how do you record a right of setup on the balance sheet when the cash pool bank can pull money from any random participating bank account to cover for losses when a subsidiary goes bankrupt with an overdraw bank account in the Notional Cash Pool?

The In-House Bank Role in Corporate Financing

The control and management of the Assets & Liabilities ledger in a Zero Balance Cash Pool and the way a central Treasury integrates this ledger in the corporate financing philosophy can be defined as the internal bank function; in other words, the In-House Bank. After all, attracting money from companies with excess cash and lending this money out to companies that need financing is the core function of every commercial bank. The differential between de credit interest and debit interest is the revenue model for every commercial bank. At the In-House Bank, the Zero Balance Cash Pool mechanism takes care of an automated way of attracting excess cash from participating subsidiaries, and automated funding for participating with debit balances. In this respect, it is noted explicitly that a Zero Balance Cash Pool is operating at a current account level and therefore is considered working capital-based.

As mentioned before, the sweeps from the Zero Balance Cash Pool mechanism and the associated ledger at the In-House Bank are represented on the balance sheet as daily current account intercompany loans.

Integration with External Funding Sources

Due to the fact that a Zero Balance Cash Pool requires an In-House Bank function, the In-House Bank can be thé most appropriate tool to integrate with the external funding at the group level. When repeating the analogy with a commercial bank, the sweeps from the Zero Balance Cash Pool are one way of attracting funds for the In-House Bank; excess cash investments and applying external financing at the group level (e.g. syndicated senior financing) are just other means of an In-House Bank to attract funds. With these funds available the central Treasury can lend out money to subsidiaries in line with the company’s (or Treasury’s) internal financing policies. This can be by means of the daily sweeps to overdrawn bank accounts in the Zero Balance Cash Pool, but can also be by means of Intercompany Term Loans.