Funding and optimizing your business units

One of the biggest mandates for treasurers is managing risk and controlling costs, so it’s no surprise that building strong liquidity management processes is a critical goal. But gaining oversight across multiple business units and banking relationships to achieve full cash visibility can be challenging.

Gaining insight into current and future cash flow across all business units is critical to meet short- and long-term obligations of the business at the lowest cost. It’s important to ensure you have visibility into all sources of cash, including loans and credit arrangements, and evaluate future funding options. This includes moving cash from revenue-generating units to other parts of the business. Cash flow forecasting tools are extremely beneficial to help with easy decision-making.

Rationalizing banking arrangements and maintaining fewer strategic banking partners help move liquidity more effectively when needed.

Find a cash concentration approach

Once you’ve optimized visibility, you can look at options for consolidating cash. The two most common pooling solutions are physical cash concentration and notional pooling, with an in-house bank (IHB) option for more complex needs.

Physical cash concentration

Cash concentration is a strategy that empowers treasurers with automated solutions to put all available funds to work, meeting unique needs of each line of business while still maintaining control via intercompany reporting and settlement. Multiple cash accounts are consolidated into concentrated pools, creating a header entity that offsets short positions in some business units by using funds from units with surpluses. Participants maintain their own accounts, and day-to-day banking is conducted as usual.

Physical cash concentration strategies offer cost-effective ways of launching in new markets, via crosscurrency and cross-border sweeps that dynamically move funds to their destination, in the currency or currencies they are needed in, reducing the need to maintain pockets of excess cash. Additionally, target balances can easily be adjusted as operating needs change over time. Physical pooling can be rolled out in a controlled way. For companies that are new to it, we recommend setting up domestic pools, followed by cross-border and cross-currency pools and global pools as needed. You can immediately reap rewards while staying in control.

Considerations

Careful consideration needs to be given to country, currency and tax regulatory environment for each entity. Treasurers should pay close attention to intercompany loan agreements when considering multientity pooling.

Notional pooling

Notional pooling is a technique that allows cash optimization by consolidating the balances of multiple accounts, often in different currencies, without physically moving funds. Instead of moving funds, notional pooling tracks the balance and calculates interest or charges based on net positions of all accounts in the pool. This supports the need for short-term working capital by offsetting debit balances in one part of the business with credit balances elsewhere, without the need to move money around. There’s no commingling of funds, and individual account positions are maintained. Notional pooling is particularly useful for global businesses that operate in various currencies. Funds in one currency offset the deficit in another currency, reducing FX costs while optimizing interest across a basket of currencies.

Considerations

Notional pooling is not permissible in all jurisdictions. While it doesn’t result in intercompany loans, cross-guarantees are required. Carefully consider legal, regulatory and credit risks associated with notional pooling and work closely with your banking partners while considering this cash management technique.

In-house banks

This sophisticated solution is most often used by large multinationals. An IHB uses a company’s own resources to manage all financial transactions and fund each business unit, establishing funding parameters by setting up intercompany loans, cash pooling arrangements or equity investments within an organization. It’s a cost-effective way of consolidating treasury functions into one central entity, removing the need for each subsidiary to work through a different local bank. This centralization gives you visibility into all available resources, enhancing cash oversight and allowing you to allocate funds strategically by assessing the financial requirements, growth potential and risk of each unit.

Considerations

You’ll need to determine interest rates or returns expected for funds associated with the IHB, helping establish a fair cost of capital across the organization. There may also be significant regulatory requirements.

When it comes to optimizing business units and taking visibility to the next level, there’s no “one size fits all” solution. For some businesses, a good way to start may be prioritizing oversight of the units that generate the most revenue, or incorporating solutions like physical cash pooling before introducing more complexity. Another consideration is reducing manual processes — cash concentration solutions offer an easy path to automation. Whichever path you choose, prioritizing liquidity management can help take your business to the next stage of success. To find out more, contact your Bank of America representative.