TREASURY MANAGEMENT

by: Jewelyn C. Espares-Ciocon, DBA

1
 MODULE 4
CASH CONCENTRATION

Learning Objectives
At the end of this module, learners will be able to:
1. Describe the b e n e f i t s o f c a s h c o n c e n t r a t i o n a n d various cash concentration
strategies
2. Explain pooling concepts
3. Understand cash concentration methods

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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TOPIC PRESENTATION

Multinational companies with operations in multiple countries, maintain a significant

number of bank accounts. This is not considered as efficient arrangement of cash
management. An excellent solution is cash concentration, where the cash in multiple
accounts is pooled.

BENEFITS OF CASH CONCENTRATION

Elimination of idle cash

Improved investment returns

More cost-effective oversight of
accounts
Internal funding of debit balances.

CASH CONCENTRATION STRATEGIES

Centralized payments,
Complete decentralization decentralized liquidity
management

CASH
CONCENTRATION
STRATEGIES

Centralized liquidity management,

All functions centralized
decentralized payments

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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POOLING CONCEPTS

Differentiate the two (2) pooling concepts:

1. Physical sweeping method

2. Notional pooling

PHYSICAL SWEEPING
What is Physical Sweeping?

When a company sets up a zero-balance account, its bank automatically moves cash
from that account into a concentration account, usually within the same bank. The cash
balance in the zero-balance account (as the name implies) is reduced to zero whenever
a sweep occurs.
Reasons why there is e a need to track the amounts of cash swept from each
zero- balance account into the concentration account:
• Subsidiary-level financial reporting requirements.
• Interest income allocation.
• Interest expense allocation.
• Central bank reporting

NOTIONAL POOLING

What is Notional Pooling?

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. This approach allows each subsidiary company to take
advantage of a single, centralized liquidity position, while still retaining daily cash
management privileges.

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
4
COMPARISON OF ACCOUNT SWEEPING AND NOTIONAL POOLING
Where there is a choice between account sweeping and notional pooling, notional
pooling is usually the better alternative.
Notional Pooling Advantages:
1. cash does not physically leave the bank accounts of each subsidiary, which
greatly reduces the amount of intercompany loans that would otherwise have to
be recorded.
2. eliminates the treasury overhead cost that would otherwise be associated
with tracking and recording the intercompany loans.
3. the bank may be able to automate the calculation of interest, with a physical
transfer of funds at month-end to pay out the interest income to each
subsidiary.
NONPOOLING SITUATIONS
What happens in Non-pooling situations?
A company may need to use a local bank that cannot be linked into its corporate
account sweeping or notional pooling structures. The company’s account balances
within that bank must be managed manually to prevent overdrafts, since their cost
usually greatly exceeds the interest income to be earned on the same account incurring
overdraft fees.
BANK OVERLAY STRUCTURE
Companies operating on an international scale frequently have trouble reconciling the
need for efficient cash concentration operations with the use of local banking partners
with whom they may have long-standing relation- ships and valuable business contacts.
The solution is the bank overlay structure.

CASH CONCENTRATION CONTROLS

It pushes all cash balances into a single location for easier monitoring. Otherwise, the
treasury staff would be faced with a large jumble of accounts, over which it might
exercise little control.

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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 CASH CONCENTRATION CONTROLS
Compare Verify the allocation
Review target Review excluded intercompany loan of interest income to
balances accounts. rates to market subsidiaries.
rates..

Verify the
calculation of
intercompany loan
balances

CASH CONCENTRATION POLICIES

The corporate treasury department manages all cash concentration activities

Discuss cash concentration strategies for both small and large companies are noted
in the following two policies:

Small-company policy
Large-company policy

METHODS OF CASH CONCENTRATION

When a business has several cash accounts, it can pool the funds into a centralized
account. The cash consolidation can be performed in various ways.

Zero Balance Method

Cash balances from all accounts of a company or group will be transferred to the main
treasury account in this method. The cash consolidation can be performed daily. Each
sub-account will have zero balance at the day end.

Fixed Sweep Method

In this method, a fixed amount is transferred from all sub-accounts to the main treasury
account. If there is insufficient balance in any sub-account, the transaction takes place
when cash is available.

Target Balance

It is also called the minimum balance method in which sub-accounts keep a target
balance and transfer the funds above that target to the main account.

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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Percentage Method

A fixed percentage of total cash available in each account is transferred to the main
account.

Investment Sweep Method

Businesses can use the investment sweeps to transfer cash balances to investment
instruments such as term deposits. However, this method requires special
arrangements with banks or investment funds management companies .

Advantages Of Cash Concentration

It is an important treasury management concept that helps businesses and online

banking channels in several ways.

Here are some key advantages of cash concentration:

 It reduces dependency on short-term financing and improves liquidity.

 Businesses can use consolidated funds for large investments.
 It helps businesses in quick funds disbursements.
 Businesses can use larger cash funds to obtain better financing facilities.
 It helps ACHs to clear funds and electronic transfers rapidly.

Disadvantages Of Cash Concentration

Despite several advantages of pooling cash funds and centralization, it can come with a
few disadvantages as well.

 Centralization of cash funds can be costly.

 Funds disbursements to different sub-accounts can delay group payments.
 Centralized cash means less autonomy and economic stability to sub-accounts
(held by subsidiaries or departments).
 It may pose a liquidity risk at the sub-account level.
https://www.accountinghub-online.com/cash-concentration/#:~:text=Cash
%20concentration%20is%20a%20treasury,to%20a%20single%20centralized
%20account.

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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Assignment: Base on Philippine setting
a. Discuss and Explain : Intercompany Loan Tracking Procedure
b. Discuss and Explain : Interest Income Allocation from Cash Concentration
Account Procedure

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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 GUIDED EXERCISES/LEARNING ACTIVITIES
4.

• Faculty-facilitated discussion of Cash Concentration

• Quescussion where students are called to ask questions which will check their
levels of understanding on a specific topic. It can also help determine topics to
discuss in subsequent lectures

ASSESSMENT

Students must pass the Performance Assessment 4 (Quiz/Graded Recitation) on

Cash Concentration (Synchronous). A 20-25 items timed quiz will be given to
assess their understanding of the topic

ASSIGNMENT

• Reading assignment: Working Capital Management (Asynchronous)

REFERENCES

Steven M. Bragg , “Treasury Management: The Practitioner's Guide”,

Wiley Publication

Robert Cooper, “Corporate Treasury and Cash Management”, Palgrave Macmillan

Publishers.

S.K. Bagchi, “Treasury Risk Management”, 2nd Edition, Jaico Publishing House

https://www.accountinghub-online.com/cash-concentration/#:~:text=Cash
%20concentration%20is%20a%20treasury,to%20a%20single%20centralized%20account.

https://docs.oracle.com/cd/F12038_01/html/OBLM/OBLM03_Cash_Concentration.htm

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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After taking this module, kindly share your learnings or major take-aways.
Write at least three (3) answers below.

edging authorizations, contracts, hedge accounting, and risk assessment

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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Authorization Contractual Controls Hedge Accounting
Controls Controls
Define dealing Verify contract terms and Include in the hedging
responsibilities signatory procedure a
Issue an updated requirement for full
signatory list to documentation of each
counterparties at hedge
least once a year
Centralize foreign
exchange trading
operations

General Risk
Assessment Controls

Determine
counterparty credit
worthiness.
Full-risk modeling.
Audit spreadsheet
calculations and
contents.

FOREIGN EXCHANGE HEDGE

POLICIES
The following policies are divided into ones that introduce consistency into the
accounting for hedges, create boundaries around the amounts and durations of
hedging activities, and authorize the treasurer to engage in hedging.

Instruction: Differentiate the different policies by completing the table below:

POLICY DESCRIPTION

• Accounting Consistency Policies

• Authorization Policies

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
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 FOREIGN EXCHANGE HEDGE
PROCEDURES

Describe and discuss: Foreign Exchange Hedging Procedure Statement

GUIDED EXERCISES/LEARNING ACTIVITIES

• Faculty-facilitated discussion of Foreign Exchange Risk Management

• Quescussion where students are called to ask questions which will check their
levels of understanding on a specific topic. It can also help determine topics to
discuss in subsequent lectures

ASSESSMENT

Students must pass the Performance Assessment 9 (Quiz/Graded Recitation) on

Foreign Exchange Risk Management (Synchronous). A 20-25 items timed quiz
will be given to assess their understanding of the topic

ASSIGNMENT

• Reading assignment: Interest Risk Management (Asynchronous)

REFERENCES

Steven M. Bragg , “Treasury Management: The Practitioner's Guide”, Wiley

Publication

Robert Cooper, “Corporate Treasury and Cash Management”, Palgrave Macmillan

Publishers.

S.K. Bagchi, “Treasury Risk Management”, 2nd Edition, Jaico Publishing House

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
12
After taking this module, kindly share your learnings or major take-aways. Write at
least three (3) answers below.

TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
13
 TREASURY MANAGEMENT
by: Jewelyn C. Espares-Ciocon, DBA
14