justifying the independent structure. The reinvoicing center, however, is not for
everyone, given its separate incorporation needs and staffing if it is going to be ef-
fective in the repricing and taking title to intrafirm goods flows.
The sample firm in Exhibit 5.4 also illustrates one of the primary complexities of
international cash management—the need to work through and manage a dual- or
multiple-bank system. The payments by customers to the subsidiaries are typically
processed through a local bank. Payments between the subsidiary and the parent,
however, are frequently processed through branches, correspondents, or affiliates of
the parent’s primary bank back in the United States.^10 The U.S. bank affiliate struc-
ture serves as the primary conduit for real-time information regarding the cash flows
and balances within the foreign markets. Typically, the U.S.-based parent will moni-
tor cash balances in its foreign local banks (French and Spanish in Exhibit 5.4)
through the electronic reporting systems of its U.S.-parent bank. There is at present
a highly competitive marketplace for cash management system sales by many banks
in New York and London to provide these services to the corporate public. Unfortu-
nately, the systems are still years away from providing the technological and real-
time accuracy, access, and comprehensiveness which the ideal multinational treasury
system would require.
(c) Techniques for Effective Deployment of Funds. The firm of Exhibit 5.4 would,
depending on the magnitude of cash flow differences between the two foreign sub-
sidiaries and the operational and financial linkages between subsidiaries and parent,
make varying levels of effort to reduce the total cash stock and cost within the sys-
tem. This international cash management/banking activity might take one of two
forms,cash concentrationorcash pooling.
Cash poolingis exactly what it sounds like, a commingling of cash flows or bal-
ances between affiliate operations. Pooling is often readily available in-country, but
can be quite complex to establish and run cross-country. Cash pooling can take a va-
riety of forms, including notional poolingandzero balancing, each of which requires
the establishment of a master account in each country over the individual affiliate ac-
counts.Notional pooling(also commonly referred to as interest compensation) is
when interest charges are calculated on a notional pool of cash—the master account,
although the individual balances are not intermixed. Individual balances are mathe-
matically pooled for the calculation of master account interest expense/charges. Zero
balancingrefers to a structure in which funds are transferred from the subsidiary ac-
counts each day to the master account in order to maintain an end-of-day zero-bal-
ance on the affiliate level. Although many treasurers prefer a structure in which no
physical transfer is made, the notional pooling approach, both techniques are finan-
cially equivalent.
Cash concentrationis the establishment of a cross-border master account to which
all individual foreign affiliates have access. Essentially the creation of an internal
bank, the cash concentration account can be constructed to allow access to funds, and
accept payment of funds, in a variety of currencies. It may be constructed within the
framework of a cash pooling structure, or independently formed so that multiple cur-
rencies are accessible to multiple units in multiple markets. Although beyond the
5 • 14 INTERNATIONAL TREASURY MANAGEMENT(^10) There is a growing consensus among international treasurers that an established local bank gener-
ally provides better services for processing of payments with domestic firms.