Cash Management in a Group of Companies

Within a group of companies it is often considered desirable for cash to be managed by
a central department which will:

1. Gather in all surplus funds from the various companies and redistribute them in accordance with the investment opportunities which best serve the group objectives;
2. Dictate the investment opportunitiesof the subsidiary companies to ensure that funds are retained where they are needed within the group;
3. Arrange the investment outside the business of funds which are temporarily surplus to group needs;
4. Negotiate centrally any bank overdraft facilities, and the raising of new long-term capital.
   With regard to internal investment it sometimes appears that priority is given to projects from those companies which are already profitable (since they are able to show better incremental returns than those which are currently less successful); and it is argued that the loss-making companies may well have the greater need for operations.
   In relation to overdraft facilities, the argument for Group central negotiation is that only one banker (or a lead banker) will be involved who will be well informed on the whole of the group’s activities, and that all the resources of the group will be available as security. This does, however, put the whole group at risk if credit facilities are reduced. If the various companies have a good local relationship with the banks they have used
   individually in the past, it can happen that the total of locally negotiated overdrafts is greater than could have been obtained centrally. While the withdrawal of one facility still leaves the other companies untouched. The payment of creditor accounts centrally is easier to arrange, though it may involve delays in payment if involves first to be approved by local offices. Whether centralised purchasing is beneficial will depend on whether the advantages of standardised specifications and the negotiation of build discounts are offset by a loss of specialised purchasing skills for a diverse range of products and by delays in the procurement of urgently needed supplies. The majority of the foregoing comments will apply equally to a single company having divisional profit centre in scattered locations.

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