Plain definition
Cash pooling is a banking and treasury arrangement that lets companies in the same group centralise cash or offset account balances. Its purpose is to reduce idle cash and external borrowing while giving the group a clearer view of its daily position. It does not erase the fact that each subsidiary is a separate legal entity with its own obligations.
Illustrative example
Monetary examples use Saudi riyals (SAR). The same principles apply in other currencies.
A group has two Saudi subsidiaries. On Monday, Subsidiary A has cash after its payroll run, including above its approved operating floor. Subsidiary B needs to pay imported stock on Wednesday. Without a pool, B may draw an overdraft while A earns little on idle cash. Under an approved physical pooling arrangement, treasury transfers from A to the central account and records an intercompany balance owed by B.
After the transfer, A still holds , or above its floor. B pays the supplier on time and the group avoids two days of overdraft interest. Treasury must apply the agreed intercompany interest and ensure the transfer is permitted by both entities’ agreements.
Why it matters
The common error is to see a large group-wide balance and assume every company can use it immediately. That can leave the entity that earned the cash unable to meet its own obligations, or create undocumented related-party exposure.
Practical consequence
Use a written pooling policy and bank agreement that identify participating entities, sweep rules, account limits, authority, interest, and how balances are settled. Treasury should prepare a daily position by legal entity, not only a group total, and test each entity’s minimum cash and restrictions before a transfer. Finance should reconcile bank movements to intercompany ledgers and review the arrangement with legal and tax advisers when entities or jurisdictions change.