Cash pooling converts bank balances into intercompany exposure

Physical cash pooling is the transfer of participant account balances to a central account so a group can manage its external cash and borrowing together. A participant that transfers surplus cash receives an intercompany claim under the pool arrangement rather than retaining the same direct bank deposit.

Interest savings arise from offsetting balances

Take Subsidiary A with a £4 million deposit earning 3.8% and Subsidiary B with a £3 million overdraft costing 5.2%. Their annual external interest income and expense are £152,000 and £156,000, for a net £4,000 expense.

If a pool uses A’s surplus to fund B’s deficit, the group’s remaining external position is a £1 million deposit. At the same 3.8% deposit rate, it earns £38,000. The improvement is £42,000 before pool fees and other costs: £3 million multiplied by the 1.4-percentage-point borrowing-and-deposit spread.

The saving follows from reducing simultaneous external borrowing and depositing. It does not require the subsidiaries’ underlying businesses to become more profitable.

Consolidation removes an internal balance, not a participant’s exposure

Under a pool-header structure, A lends £4 million to the header, which advances £3 million to B and retains £1 million at the bank. The header owes A; B owes the header.

Those internal balances eliminate in consolidated group accounts. They remain claims between legal entities. If A needs its £4 million back, the header must obtain cash from B, external funding, or another source. A’s legal claim is not identical to its former on-demand claim against the bank.

Group-level cash reporting can therefore show an efficient £1 million net balance while concealing the funding dependence of the participant that supplied the surplus.

The pool agreement allocates both savings and risk

Participant interest rates determine how much of the £42,000 saving goes to the depositing subsidiary, the borrowing subsidiary, and the header. Guarantees, repayment terms, withdrawal rights, and security determine who bears losses and when a participant can recover cash.

A low internal borrowing rate benefits the borrower but reduces compensation to the entity supplying funds. The appropriate allocation depends on the functions, exposures, and legal and tax setting; group ownership alone does not make the transfer costless.

The consequence becomes material when participants have outside creditors, different minority owners, transfer restrictions, or different liquidity needs. A consolidated benefit does not establish that every participant receives the same benefit.

Notional pooling has a different claim structure

Notional pooling adjusts interest across qualifying balances without the same physical transfer into a header account. Participant bank balances remain, but set-off rights, cross-guarantees, fees, and local restrictions can still connect their exposures.

The comparison therefore needs both an interest calculation and a map of legal claims. “Cash pooling saves interest” describes the group’s external price; it does not identify who must supply cash when a participant needs it.