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Capital Budgeting and Depreciation
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Single Period Dividend Discount Model
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We are already aware that commercial banks are offering several liquidity management services to their clients. In the previous article, we have already studied how notional pooling can help corporations better manage their liquidity. However, notional pooling is not the only option. In fact, there is another option called “sweeping” which is used by the vast majority of corporations in the world. This is what makes it more popular as compared to notional pooling.
In this article, we will have a closer look at what sweeping is, how it helps organizations as well as the various pros and cons which are associated with this sweeping.
Sweeping is a cash concentration process used by various organizations across the globe. It is generally used by large organizations which have offices and operations spread across the globe. Since the operations of the firm are scattered across so many subsidiaries, gaining visibility over the entire process can sometimes become quite difficult. It is not uncommon for organizations to not be aware of the exact amount of cash that is being held in their accounts. This is because their money could be spread across hundreds of bank accounts being held in different currencies and in different parts of the world. This is where sweeping comes in.
The main objective of sweeping is to allow organizations to have complete visibility and control over the money which lies in their bank accounts.
The sweeping process is quite different from notional pooling. In the case of notional pooling, the amounts were actually being held in the subsidiary bank accounts. It was only assumed that the money was transferred for the purpose of interest calculation.
However, when it comes to sweeping, this is not the case. In case of sweeping, the money is actually moved out of multiple bank accounts and into a centralized account. This centralized account is maintained by the company head office. The purpose of sweeping is to ensure that all the money held in all bank accounts is transferred to one centralized bank account periodically.
A sweep facility is offered by almost every commercial bank. Hence, over a period of time, there have been several financial innovations that have taken place. As a result, there are several types of sweep facilities which are offered by commercial banks. The details of some of these facilities have been mentioned below:
In most cases, companies want to completely drain out the bank account at the subsidiary company and consolidate the cash at the corporate headquarters. In such cases, a zero-balance sweep facility is set up. A cut-off time is decided and any balance in that account at that time is transferred to the main account.
In most cases, the amount is swept daily from the subsidiary account to the main account. This frequency was considered to be sufficient earlier. However, now since many companies work across the globe, the business timings cannot really be standardized. Hence, once-a-day sweeping does not work because of the involvement of various time zones.
The fact of the matter is that sweeping is an old and tested method for liquidity management that has been used by large corporations. This is a very important service provided by commercial banks and forms an integral part of their overall value proposition.
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