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Letting everyone into the pool. (Cash Management).

Consolidation or pooling funds, especially at companies with multiple units, can improve the efficiency of cash operations and may be more fruitful than chasing after more yield.

Imagine this scenario: Interest rates are at historic lows, and it's mighty tough to drum up a few more basis points of yield without taking on too much risk. Banks are reluctant to lend and are leaning on companies to expand their non-credit relationships. Experts talk about how important it is to make cash operations more "efficient."

What you're imagining, of course, is today's environment -- a time when "pooling" or concentrating funds to increase total yield has gotten renewed attention. It's not exactly a new idea, and many major corporations have been doing it for years. But increasingly, it's being tweaked by ideas like automation, offshore facilities, multilateral netting and the trading of money market funds.

"The concept of investment pools has been around for quite a while, but the timeliness is the idea that interest rates are very low, and have been for a long time," says Jack May, senior vice president of, a Web-based provider of money market funds services. "A lot of focus for investment managers is efficiency -- not hunting around for a few more basis points in return, but cutting costs."

Logically, companies get a better return on their cash when they can consolidate it, rather than let it sit at various subsidiaries; if they do cash management through a bank, they can use higher compensating balances as leverage for better terms or more services. When a subsidiary needs some of that money, parents have frequently used intra-company loans, with the subsidiaries -- frequently unconsolidated "arms-length" units borrowing from the parent at the prime rate or a similar benchmark.

Many companies still use that technique, sometimes treating the transactions as "phantom loans" that are really only accounting entries. May says that a system that funnels "loans" from headquarters to a subsidiary allows subsidiaries to have their own profit centers and to be incented on performance. What may be "phantom" expenses for domestic subsidiaries become real when tax law differences exist, especially in Europe, and may result in the foreign units engaging in tax arbitrage.

At many companies, arms-length relationships are in place and parent companies can repatriate only dividends from overseas subsidiaries, says Ken Parkinson, a partner at Treasury Information Services in Hopewell, N.J. International transfers are usually treated as loan guarantees from the parent, he adds, and are harder to manage for tax reasons. Intra-company loans, however, allow transfers to be made not only between the parent and the sub but between a richer unit and a poorer one, he says.

At a time when domiciling companies in offshore entities with lower tax burdens has commanded attention -- and not a little criticism -- cash management is also developing more of an offshore presence. Some companies have set up offshore facilities that the foreign subs can direct their cash to, rather than dealing with the complex currency and tax issues that would result from sending it back to the home nation.

Major corporations have "tried to integrate all of their treasury operations globally, although it's nigh on to impossible to pool cash from different countries," Parkinson says. "They tend to do that by subsidiary, or by setting up offshore entities and keeping all of their foreign subsidiaries reporting into that entity." Some companies with substantial European operations, for instance, have set up "umbrella" cash facilities that collect cash denominated in euros.

Short-term investment pools "are important if you have subsidiaries," says David Shafer, managing director, National Cash Management Practice, for Ernst & Young LLP. "If all of them are doing their own overnight investments, if you can get that into one pool -- even if you just stay at same maturity -- you will do better. On top of that, a lot of companies gain more efficiencies that way."

Indeed, it's hard to talk to any experts in this area without hearing about "efficiency."

"Companies are automating more, using the automated clearing house (ACH) and other electronic funds transfers," says Parkinson. "Companies would want to do that to see the effect of accelerating their cash operations."

"Pooling is inherent in many less-than-large companies, which have decreased their bank relationships to a handful in recent years," he adds. "They used to have a problem in dealing with multiple banks. But the efficiency of the concentration is still a problem; you could have one bank and still do it poorly," especially if lockbox disbursements were not handled well.

E&Y's Shafer agrees that concentrating funds collection from a lock-box or wire transfer is a critical function. "Information reporting and projections of funds availability are key," he says. "Companies want to use the ACH because it's cheaper, but wires are more precise."

TreasuryPoint's May says that he sees more organizations spending time on improving efficiency -- especially "complex organizations" like energy companies or insurance firms that are required to have individual accounting for various subsidiaries. All of the focus on efficiency comes as interest rates have budged little in recent months and remain at rock-bottom levels. While that's theoretically good for borrowers, corporate reporting scandals and weak earnings have kept credit unusually tight; for the investment manager, current rates present a daily challenge to scrape up a bit more yield.

"The bad news is that interest rates right now are horrible, and without taking increasingly significant risks, companies are not getting substantial yields," says Parkinson. "But, by the same token, rates have been so low for so long that there are no expectations" that short-term rates will provide a meaningful bump any time soon. Says Shafer: "If I'm investing cash overnight, and I'm a major company, I'm likely to view the fed funds rate as the maximum [return] I can hope for."

Industry professionals see a gradual trend away from dedicated company treasury functions or direct relationships with mutual fund companies. "For the most part, the Fortune 50 have their own investment shops," says May. "They'll buy individual securities themselves," though some use money market funds and sweep accounts to manage overnight cash.

"Anecdotally, when faced with having to upgrade systems, some [major corporations] are now going out of house and trying to convert what they have," Parkinson says. "Texaco chose XRT, and Philip Morris went with Sungard [Treasury Systems]," he adds, referring to two providers of custom treasury software.

SunGard's is a good example of the Web-based systems in the marketplace. It automatically consolidates bank balances and transactions, and displays an organization's cash information automatically in a "Cash Position Worksheet" for immediate action. It offers data entry screens for bank balances, transactions and wire transfer requests, and automatically reconciles expected versus actual transactions.

TreasuryPoint's May says his company's institutional money market trading balances recently topped $3 billion. Established at the beginning of 2001, invests in 43 institutional money market funds from well-known fund families. The firm operates essentially as a Web portal, allowing clients to trade institutional money market funds. May says the technology also allows them, if they choose, to designate different subsidiaries as sub-accounts.

"Trading is done throughout the day, then settled into clients' custody accounts on a same-day basis," he says. "It's a very efficient way for organizations to keep track of interest income for each of their different sub-accounts." Other drawing cards, he says, are the product's multilateral netting capabilities -- showing net positions over different regions and company divisions -- and intra-company banking modules that allow subsidiaries to invest and borrow among each themselves.

Prior to using TreasuryPoint's trading module, Exelon Corp. did all of its money market trades by phone. Chuck Howard, treasury analyst at the Chicago-based electric utility company, says, "The remote capabilities are what really turned us toward online trading. The bottom line is efficiency. We're all trying to find the corners that we can cut to make things go a Little bit smoother and with less people."
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Title Annotation:pooling funds can improve the efficiency of cash operations
Author:Marshall, Jeffrey
Publication:Financial Executive
Date:Oct 1, 2002
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