Notional Pooling, Cash Pool, Cash Pooling, Cash Sweeping

Notional pooling is a mechanism for calculating interest on the combined credit and debit balances of accounts that a corporate parent chooses to cluster together, without actually transferring any funds between the accounts. It is ideal for companies with decentralized organizations that want to allow some autonomy to their subsidiaries, including their control over bank accounts.

The advantages of notional pooling are:

• Single liquidity position. It allows each subsidiary company to take advantage of a single, centralized liquidity position, while still retaining daily cash management privileges.
• Local allocation of interest income. Each account in the pool receives an allocation of interest income at the end of each month that is based on the contribution of the account to the total balance being invested during the investment period.
• No inter-company loans. It avoids the use of cash transfers to a central pooling account, so there is no need to create or monitor inter-company loans for tax purposes.
• Short-term commitment. A notional pooling arrangement does not require a long-term commitment with a bank; on the contrary, it is relatively easy to back out of the arrangement.
• No cash transfer fees. There are no bank fees related to cash transfers, since there are no transfers between accounts that would normally trigger fees.
• No overdraft lines. It largely eliminates the need to arrange overdraft lines with local banks, since cash is retained locally.
• Increased interest income. Interest earnings tend to be higher under a notional pooling arrangement than if investments were made separately for smaller individual accounts, since pooled funds can be invested in larger instruments that generate higher returns.
• Agreeable to minority owners. It offers a solution for partially-owned subsidiaries whose other owners may balk at the prospect of physically transferring funds to an account controlled by another entity.
• Reduced foreign exchange transactions. Where global notional pooling is offered (usually where all participating accounts are held within a single bank), the pool offsets credit and debit balances on a multi-currency basis without the need to engage in any foreign exchange transactions.
• Local autonomy. If a parent company wants to preserve the operational independence of its subsidiaries, notional pooling allows them to retain cash balances in their local bank accounts. This also makes it easier to conduct bank reconciliations at the local level, since there are no cash transfer transactions to a central account, as would be the case with a cash sweeping arrangement.
• Reduced interest expense. It allows a company to reduce its interest expense to the minimum level, since debit and credit positions are offset.

Once a company earns interest on the funds in a notional pooling account, interest income is usually allocated back to each of the accounts comprising the pool.  For tax management reasons, it may be useful for the corporate parent to charge the subsidiaries participating in the pool for some cash concentration administration expenses related to management of the pool.  This scenario works best if the corporate subsidiaries are located in high-tax regions where reduced reportable income will result in reduced taxes.
The main downside of notional pooling is that it is not allowed in some countries. It is difficult to find anything but a large multi-national bank that offers cross-currency notional pooling.  Instead, it is most common to have a separate notional cash pool for each currency area.

Cross-Border Cash Pool
A cash pool is a cluster of subsidiary bank accounts and a concentration account into which funds flow from the subsidiary accounts. If a pooling arrangement includes accounts located in more than one country, this is known as a cross-border cash pool.

Cash Sweeping
A cash sweeping system (also known as physical pooling) is designed to move the cash in a company’s outlying bank accounts into a central concentration account, from which it can be more easily invested. By concentrating cash in one place, a business can place funds in larger financial instruments at higher rates of return. Cash sweeps are intended to occur at the end of every business day, which means that quite a large number of sweep transactions may arise over the course of a year.


Cash sweeping can be fully automated as long as a company keeps all of its bank accounts with a single bank, where the bank can monitor account balances. Since several banks now span entire countries, it is not especially difficult to locate banks that can provide comprehensive sweeping services across broad geographic regions.
The Zero Balance Account
One way to implement a cash sweeping system is the zero balance account (ZBA). A ZBA is usually a checking account that is automatically funded from a central account in an amount sufficient to cover presented checks. To do so, the bank calculates the amount of all checks presented against a ZBA, and pays them with a debit to the central account. Also, if deposits are made into a ZBA account, the amount of the deposit is automatically shifted to the central account. Further, if a subsidiary account has a debit (overdrawn) balance, cash is automatically shifted from the central account back to the subsidiary account in an amount sufficient to bring the account balance back to zero. In addition, subsidiary account balances can be set at a specific target amount, rather than zero, so that some residual cash is maintained in one or more accounts.
There are three possible ZBA transactions, all of which occur automatically:

• Excess cash is shifted into a central account
• Cash needed to meet payment obligations is shifted from the central account to linked checking accounts
• Cash needed to offset debit balances is shifted from the central account to linked accounts

The net result of a ZBA is that a company retains most of its cash in a central location, and only doles out cash from that central account to pay for immediate needs.
Sweeping Rules
A number of rules can be set up in a cash sweeping system to fit the cash requirements of the business entity using each account, as well as to minimize the cost of the system. Rules usually address:

• Frequency. Cash can be swept from some accounts at longer intervals than for other accounts. Some accounts accumulate cash very slowly, and only require an occasional sweep.
• Threshold sweeps. Cash can be swept only when the cash balance in an account reaches a certain level. This minimizes the cost of initiating sweeps for very small amounts of cash.
• Target balances. A designated amount of cash can be left in an account to ensure that a certain balance is always available. This may require that cash be sent into an account, rather than the usual outbound sweep. Target balances are useful when day-to-day operating needs are being met locally through an account. For example, a local bank may automatically extract its monthly service fee from an account, and will charge an overdraft fee if the account contains no cash with which to pay the service fee.

Sweep Problems
Cash sweeping is not to be engaged in lightly when cash is being moved among the accounts of multiple business entities, and especially when cash is being moved across national boundaries. Cash sweeping can cause the following problems related to interest:

• Recognition of interest income. Some local tax jurisdictions will take exception if a business recognizes all of its interest income at the corporate level, since the cash that generated the interest income is located at the subsidiary level. To offset this problem, all interest earned should be allocated back to the subsidiaries based on the amount of their cash that was used to generate the income.
• Recognition of interest expense. As was the case with interest income, some tax jurisdictions want to see an interest charge recorded against those subsidiaries that required a cash infusion to avoid an overdraft situation. The interest charge should be based on the interest rate paid by the company for its debt; in the absence of any debt, use the market interest rate.