Five subsidiary accounts priced on their own, swept into a physical pool and combined in a notional one, with who keeps the saving and why net cash is the wrong base.
A cash pool saves the spread between the overdraft rate and the deposit rate on every euro of deficit that a surplus elsewhere in the group can cover. On five illustrative eurozone subsidiaries with 30,000,000 of overdrafts and 70,000,000 of surpluses, physical pooling turns a net interest cost of 750,000 into income of 570,000, a saving of 1,320,000 a year. A notional pool saves 1,200,000: less, because the bank pays a lower rate and charges a higher fee on a pool it cannot net on its own balance sheet.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A group runs one bank account per subsidiary in the euro area. Some are in surplus, some overdrawn, and each is priced by the bank on its own. Balances are annual averages; rates and fees are illustrative.
| Subsidiary | Balance | Rate | Interest |
|---|---|---|---|
| Germany | 40,000,000 | 1.50% | 600,000 |
| France | 25,000,000 | 1.50% | 375,000 |
| Netherlands | 5,000,000 | 1.50% | 75,000 |
| Italy | −18,000,000 | 6.00% | −1,080,000 |
| Spain | −12,000,000 | 6.00% | −720,000 |
| Group | 40,000,000 | −750,000 |
The group has 40,000,000 of net cash and pays 750,000 a year of net interest. It is borrowing at 6.00 per cent from the bank and lending the bank its own money at 1.50.
Every evening the bank sweeps each subsidiary's balance to zero against a header account owned by the group's treasury company. Surpluses move up, deficits are funded down, and the bank sees one balance: 40,000,000.
Group interest, physical pool = net balance × credit rate − fees
= 40,000,000 × 1.50% − 30,000 = 570,000
Saving = 570,000 − (−750,000) = 1,320,000
Check: deficits × (debit rate − credit rate) = 30,000,000 × 4.50% = 1,350,000, less the 30,000 fee
The sweeps create real intercompany loans, so each subsidiary now earns or pays an intercompany rate set at arm's length, here 1.75 per cent on deposits and 4.00 per cent on borrowings. Inside the group those flows net to zero; they decide only where the 1,320,000 lands.
| Entity | Intercompany interest | Gain against standalone |
|---|---|---|
| Germany | 700,000 | 100,000 |
| France | 437,500 | 62,500 |
| Netherlands | 87,500 | 12,500 |
| Italy | −720,000 | 360,000 |
| Spain | −480,000 | 240,000 |
| Header account, net of bank interest and fee | 545,000 | 545,000 |
| Group | 570,000 | 1,320,000 |
In a notional pool no money moves. The accounts stay where they are, and the bank pays or charges interest on the notional sum of the balances. Because the bank must still carry 70,000,000 of deposits and 30,000,000 of overdrafts on its own balance sheet, it prices that in, here with a credit rate of 1.25 per cent and a higher fee.
Group interest, notional pool = 40,000,000 × 1.25% − 50,000 = 450,000
Saving = 450,000 + 750,000 = 1,200,000
Excel, balances in B2:B6: =SUM(B2:B6)*1.25%-50000-SUMPRODUCT((B2:B6>0)*B2:B6*1.5%+(B2:B6<0)*B2:B6*6%)
The notional pool saves 120,000 less than the physical one on these terms. It buys something for that: no intercompany loans to document, no transfer pricing on daily sweeps, and each subsidiary keeps its own cash for its own payments. Notional pooling is also not offered in every country, and its legal and capital treatment differs from bank to bank.
Hold the other four accounts and move the German balance. The net position changes, the saving barely does.
| Germany | Group net | Standalone | Physical pool | Saving | Notional pool | Saving |
|---|---|---|---|---|---|---|
| 40,000,000 | 40,000,000 | −750,000 | 570,000 | 1,320,000 | 450,000 | 1,200,000 |
| 20,000,000 | 20,000,000 | −1,050,000 | 270,000 | 1,320,000 | 200,000 | 1,250,000 |
| 5,000,000 | 5,000,000 | −1,275,000 | 45,000 | 1,320,000 | 12,500 | 1,287,500 |
| −10,000,000 | −10,000,000 | −1,950,000 | −630,000 | 1,320,000 | −650,000 | 1,300,000 |
The saving depends on how much deficit can be offset by surplus, and on the spread between the two rates, not on the group's net cash. A group in net debt still saves, because the overdrafts it closes are offset against surpluses it already has. The gap between the two pools narrows as the net balance falls, since the notional pool's lower credit rate applies to a smaller surplus.
The book's own group, its five readings of cash and the pool before and after, are in the free workbooks for this book. For the next question, how much of the surplus to hold and where, see where a company should park its surplus cash.
Physical pooling, or zero balancing, moves the money: each account is swept daily into a header account, creating intercompany loans. Notional pooling moves nothing; the bank calculates interest on the combined balance. In the worked case physical pooling saves 1,320,000 a year and notional pooling 1,200,000, because the bank pays 1.25 instead of 1.50 per cent, and charges 50,000 instead of 30,000 in fees, on a notional pool it must carry gross.
Multiply the deficits that surpluses can cover by the spread between the overdraft rate and the deposit rate, then deduct fees and any rate concession. With 30,000,000 of overdrafts at 6.00 per cent and surpluses earning 1.50 per cent, the gross benefit is 1,350,000; after a 30,000 fee, 1,320,000. The group's net cash position barely changes the answer.
Under IFRS only where there is a legally enforceable right of set-off and an intention to settle net, which in practice usually means actual sweeps at period end. Otherwise the group reports gross: 70,000,000 of cash and 30,000,000 of overdrafts in the worked case, which matters for any covenant measured on gross debt.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: corporate finance, valuation and markets → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.