Network of a single bank. The approach only works within a single bank`s network of accounts, as the bank must be able to ”see” all account balances. If a company uses multiple banks, it can instead apply a separate fictitious pooling agreement with each bank or a mixture of fictitious pooling and cash scans. This type of cash pooling then merges the accounts of each subsidiary without collecting cash or paperwork. Depending on the group`s strategy, cash pooling can take different forms, provided that a framework and conditions have been established beforehand with the bank that draws the different hierarchical levels and roles of each account, so that the bank can organize centralization at one or more account levels. The cost of fictitious pooling is lower than that of cash scanning operations because no transaction is used to transfer money from one account to another. It also eliminates the time it takes for treasury staff to manually move funds. Finally, the overdraft burden of banks, which could otherwise be levied on negative balance accounts, is eliminated, since debit and credit positions on all accounts are combined by fictitious pooling; Ideally, credit positions exceed the amount of all accounts receivable balances. Cash pooling is a centralized cash management strategy aimed at balancing the accounts of a group`s subsidiaries. The ultimate goal is to optimize health and cash management by overcoming the imperfections of financial markets with fewer financial costs. Cash pooling can be used to manage the multinational group`s cash position on a consolidated basis and to concentrate the group`s cash in one place. A cash pool is usually managed by a group company called the treasury pool leader.

The reasons for entering into a cash pooling agreement can be threefold: availability. Fictitious pooling systems are banned in some countries and impractical in other countries where banking systems are not sufficiently integrated to allow virtual aggregation of funds. The reason for the prohibition of fictitious pooling is that some governments believe that such pooling is a mixture of funds from different companies. Fictitious pooling is allowed in most European countries, but not in the United States. No inter-company loans. It avoids the use of money transfers to a central pooling account, so there is no need to create or monitor business-to-business loans for tax purposes. Reduction of foreign exchange transactions. When global fictitious pooling is proposed (typically when all participating accounts are held in a single bank), the pool balances creditors and accounts receivable on a multi-currency basis without the need for foreign currency transactions. The concept of fictitious pooling is particularly useful when individual accounts are held by subsidiaries who want to have control of their cash flow and do not want to see it mixed up in a central concentration account. Another advantage of fictitious pooling is that some banks offer cross-currency pooling. This means that interest is earned on cash holdings in multiple currencies without ever having to make currency conversions into a single investment currency. The advantages of the cash pooling strategy are as follows: Centralized cash management is achieved by debiting the bank accounts of the subsidiaries to the centralization account of the holding company.

The company`s CHIEF Financial Officer can thus have a 360-degree view of the Group`s cash and liquidity and know exactly the cash flow status of its subsidiaries. Local self-government. If a parent company wishes to maintain the operational independence of its subsidiaries, fictitious pooling allows it to keep cash balances in its local bank accounts. It also facilitates bank reconciliations at the local level, as there are no cash transfer operations to a central account, as would be the case with a cash scan agreement. From a transfer pricing perspective, the central question is how the benefits of the cash pooling agreement should be shared among the Participating Group companies. Notwithstanding the conclusion of the cash pooling agreement with a third-party bank, the responsibility for use at market interest rates remains within the multinational group. These internal interest rates will most likely be different from the external bank interest rate. Because the solvency of a debtor (with its own individual solvency) plays an important role in determining the amount of an interest rate used. In the situation of a physical cash pool, the debtor is not the external bank, but in fact the participant in the cash pool with a debt position.

The internal debit and credit interest rates will therefore generally be different from the bank`s interest rate and will depend on the individual solvency of each participating company. This type of cash pooling requires the mastery of its accounts (and a ZBA – Zero Balance Account). ”Zero Balance” cash pooling makes it possible to centralize all of the Group`s cash flows on a single account, then to visualize and review all the cash conditions of each subsidiary and the parent company. When available, fictitious pooling is administratively simple and allows money to be stored in accounts at the local level. However, the system is not allowed in some countries and cannot be used as a single system where accounts are managed by multiple banks. The main disadvantage of fictitious pooling is that it is not allowed in some countries. It is difficult to find anything other than a large multinational bank that offers a nominal cross-currency pooling. Instead, it`s more common to have a separate fictitious cash pool for each currency area. .