One of the S&P 500 companies proudly presented its new cash pooling structure at the treasurer’s conference in Miami in 2012. At the end of the presentation, the speaker added: “We have a USD cash pool, but we still don’t know how to deal with multiple currencies we use across the globe.” My boss and I looked at each other and said simultaneously: “Should we tell them about BMG?” Only then we realised how sophisticated our cash management structure at Johnson Controls Inc. was.
Bank accounts as building blocks
Do you remember when you were a child and creatively built structures from Lego, with multilevels and different colours? Well, besides the fancy words that people outside the finance world don’t understand, global cash management isn’t very different.
So let’s cover the basic building blocks first. Effective cash management consists of liquidity management and efficient use of cash. Liquidity management means that the company maintains sufficient funds, at the right time, place and in the right currency to be able to pay its obligations. Efficient use of cash means minimising the cost of short-term debt and maximising the return on short-term investments.
Cash pooling is a cash management technique. It allows companies to combine their credit and debit positions in various accounts into one account. This is done automatically by a bank.
Local and global cash management
An organisation that has business units in one country only or in a few countries in the same region and using the same currency, can use a fairly simple structure for cash optimisation.