Announcing new features for real-time, AI-assisted reconciliation. Learn more →


What is Cash Pooling?

Welcome to Learn, where we provide straightforward, easy-to-understand definitions of the payments industry.

Follow us

Cash pooling is a centralized tool that companies with multiple subsidiaries sometimes use to optimize the cash balances of all legal entities.

Cash pooling is typically used by large corporations since the technique requires a sophisticated level of structuring and many internal resources. That said, technically, any organization comprising several companies can use the technique.

Cash pooling allows the holding company (or parent company) to act as a central unit to distribute liquidity. This type of central cash management allows for the interests of each subsidiary to be served more efficiently.

What are the Types of Cash Pooling?

There are two primary types of cash pooling: notional cash pooling and physical cash pooling.

Notional Cash Pool

A notional cash pool allows a multinational group to combine the ending balances of each company’s accounts into a net balance recorded at the bank. Essentially, it centralizes all of the companies’ balances across multiple bank accounts and jurisdictions to one net balance. This does not mean the cash is transferred into one main account, but the balances are concentrated and recorded by the bank in a centralized fashion.

Physical Cash Pool

A physical cash pool is where the balance of an individual company’s bank account (a “sub-account") “sweeps” to a centralized account (the “header account”) periodically. This transfer may occur daily, weekly, or monthly, and the header account takes ownership of the cash.

Cash movement between accounts is viewed as an intercompany loan between the header entity and its subsidiaries. Since the holding entity is designated as an agent for the entire group, any interest paid and earned is viewed as bank interest and not subject to withholding tax.

Each sweeping entry is documented via the bank transactions, and “” interest is either paid or charged on a periodic basis. The bank transaction paper trail provides sufficient documentation in case of a corporate tax audit. Many view physical cash pooling as a transparent and efficient liquidity management tool.

With both types of cash pooling, an arrangement must be set between the companies involved and a third-party bank. With physical pooling in particular, loan documentation outlining the pool structure must be prepared in advance.

While some entities may choose one type of cash pooling, combinations and variations can be used to optimize cash management for each business’s unique needs. Take, for example, multinational organizations, which may employ several physical pools – one for each under which the business operates. Those individual currency pools could then be combined into a notional pool.

Is Cash Pooling Allowed in the U.S.?

Different countries have different regulations and laws regarding cash pooling, including the U.S. For U.S. entities that are considering joining either a physical or notional cash pool, there are broad tax implications to consider. These tax rules differ depending on whether the U.S. entity is depositing to or drawing on a cash pool and include items like interest deductions, withholding tax issues, cross-border payment issues, potential re-characterization of debt​​, and many others.

Try Modern Treasury

See how smooth payment operations can be.

Talk to sales
More from


Learn topic image

Learn about the key processes involved in treasury management.

A clearing account acts as a temporary account that holds transactions before they are finalized or allocated to the correct permanent account.

Read more

Continuous accounting is the ongoing process of updating a business’s general ledger with reconciled bank statement transactions as soon as they become available.

Read more

Financial reporting empowers businesses to make informed financial decisions by identifying trends and tracking performance. It also offers insights into a company's assets, liabilities, and debt management strategies.

Read more

Month-end close is a critical process where the accounting team reviews and records financial transactions to close out the month.

Read more

Recoupment refers to the recovery of spent or lost funds, especially in business operations.

Read more

Treasury Management Systems (TMS) are software applications that serve to help businesses simplify their payment operations by automatically tracking things like cash flow, assets, investments, and more.

Read more

Asset risk management is essentially a fusion of asset management and risk management.

Read more

Cash forecasting is a way for companies to look at “cash in” vs. “cash out” for a business over a window of time.

Read more

Cash pooling is a centralized cash management tool that companies with multiple subsidiaries sometimes use to optimize the cash balances of all legal entities.

Read more

Liquidity management provides visibility into cash positions over past, present, and future dates and provides an overview of the financial health of a business.

Read more

Treasury management is the act of managing a company’s daily cash flows and larger-scale decisions when it comes to finances.

Read more

The 10-K is a comprehensive report mandated by the U.S. Securities and Exchange Commission (SEC) that publicly traded companies must file annually. This report provides a thorough overview of a company's financial performance over the past year.

Read more

Subscribe to Journal updates

Discover product features and get primers on the payments industry.




Modern Treasury For

Case Studies





Popular Integrations

© Modern Treasury Corp.