Cash pooling, contradictory with a corporate cash culture?

In its “May 2016 Treasury Survey of Large Enterprises and Mid-Caps,” AFTE highlights trends to watch for corporate treasurers. AFTE insists on the tightening of access to credit for businesses and the lack of improvement in customer payment deadlines: “A majority of treasurers believe that customer payment times tend to be longer. ”

The Payments Deadlines Observatory, in its 2015 annual report, presents the erosion of the positive effects of the 2012 EML on shortening customer payment deadlines. “In 2014, 32% of companies had an average customer time above the 60-day sales threshold, taken to estimate the legal duration; they are 29% to pay their suppliers after 60 days of purchases. ” According to the Observatory,”The distribution of late payments by size of business highlights the advantage of large structures that benefit from a favorable balance of power that may encourage them to delay a settlement. Indeed, more than one large company out of two is late in paying its suppliers, compared to one in three SMEs. In the same way, the “big delays”, greater than 2 months, are proportionally twice as numerous for large companies as for SMEs.However, these delays in the payment deadlines cost businesses cash days and, when the management of the latter is already a tense flow, these sometimes compromise certain investment projects, external growth and / or international expansion. This liquidity risk, or “cash crunch”, can in extreme cases lead the company to filing for bankruptcy and must be avoided at all costs. 30% of companies that close are due to late payments.

Groups with subsidiaries can reduce this risk by setting up cash management agreements with an optimized intragroup cash pooling strategy. Cash pooling is a centralized cash management mechanism that provides security against liquidity risks for companies. This cash flow management technique, while optimized and not limited to subsidiary control by the parent company, is a lever for financial optimization. This transfer of cash from surplus cash subsidiaries to subsidiaries in need has significant benefits for the financial departments and in particular for the group treasurer: it reduces the overdraft fees paid by the group to banks ,

The centralization of cash often gives more weight to groups when negotiating financing terms with credit institutions. Centralized cash management can sometimes even allow the treasurer of the group to place excess cash. In fact, after the construction of the subsidiaries’ balances and the transfer of cash, if the overall balance is largely positive, the treasurer may consider short-term and medium-term investment opportunities, even if this is not very interesting under current conditions. . By anticipating inflows and outflows correctly, cash can be placed longer and thus generate more capitalized interest.

On paper, cash pooling seems to be a great lever for financial optimization. In reality, this technique has a major disadvantage: the entities of a group give less importance to cash forecasts, cash is no longer a question of survival for them. This undermines the cash culture of groups and cancels the theoretical benefits of cash pooling.

Thus, how to reconcile a cash pooling mechanism with a cash culture in companies?

Only the combination of a cash pooling mechanism with reliable cash flow forecasts can enable groups with subsidiaries to optimize their cash flow. To maintain a cash culture, a cash pooling type “Zero Balance Account” that requires subsidiaries to balance their positions. Groups can also impose certain conditions on their subsidiaries to access centralized cash, so that they keep in mind the need to make cash forecasts.

The Taiga Cash Cash (TCF) tool enables subsidiaries to view cash pooling within their group in a simplified way. The cash flow forecasts made by TCF take into account the cash pooling mechanisms introduced by the financial departments. and thus offers companies a global view of the group’s liquidity. The reports developed by TAIGA for the treasurers allow a finer vision of their flows, their risks and their cash forecasts.

By putting cash forecasts at the heart of the concerns of financial departments, TCF improves cash culture within groups and gives them the opportunity to develop beneficial mechanisms, such as cash pooling or internal banking.

Constance Gavini

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