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Cash pooling is a financial management strategy that businesses sometimes use as a means of consolidating cash and other securities into some sort of central account or economic funnel, maximizing the ability to make the most of those assets. At the same time, this approach can also help to reduce costs associated with those assets, including various types of account fees and charges. When considering a cash pooling strategy, it is important to properly assess how the consolidation will benefit the business, what potential liabilities may arise, and ultimately if the approach is worth the time and effort.
A simple tip for considering the creation of a cash pooling approach is to take a good look at how assets are arranged currently. Identify the advantages of this current arrangement, in terms of the ease of access to those holdings, any interest or returns that are earned from those assets, and in general what benefits are realized from this arrangement. Also consider any costs or liabilities that are incurred with the current situation. The goal is to understand exactly what is gained with the current arrangement, and what could possibly be restructured to minimize cost and increase the returns.
Once the pros and cons of the current financial strategy are identified, consider the options for consolidating those assets into one or two cash pools. The idea here is to determine which of the assets could easily be placed into a pool and more benefits than before, without triggering additional expenses or liabilities. This part of the process will often call for developing several different scenarios for the pool, then projecting the outcome of implementing each one. The projections can be used as comparisons to the current arrangement of assets, and decide if that particular cash pooling strategy is in the best interests of the company.
Since the general idea of cash pooling is to rearrange assets to best advantage, it may be necessary to consider several different configurations of the pool in order to truly determine what should and should not be done. It is very possible the one approach based on the use of a central account with one institution will not yield desirable results, while working with a different institution would produce far more attractive results. Don’t assume that if one model with one particular institution is not viable that working with a different bank or other institution would not work. Instead, methodically consider several different scenarios before deciding if and how to structure the cash pool, and ultimately the assets can be positioned in the best possible manner.
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