Letting everyone into the pool.

• Author: Marshall, Jeffrey
• Position: Cash Management - Pooling funds can improve the efficiency of cash operations

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 TreasuryPoint.com, 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...