Month-End Pool Break and the Spanish Payroll
Nordwind Industrial manufactures in the EU and runs a notional cash pool with six subsidiaries at a single relationship bank, backed by cross-guarantees. On the last business day of the month the treasurer in Hamburg compares two views of liquidity for the following day. The TMS, fed by an overnight MT940 file, reports group cash of EUR 14.2 million. The bank's portal shows EUR 11.6 million. The EUR 2.6 million difference consists of: a EUR 1.8 million supplier direct debit on the Spanish subsidiary that was posted with value date T-2 but returned unpaid on T; a EUR 0.6 million customer receipt credited on the portal on T but value-dated T+1; and EUR 0.2 million of accrued bank charges not yet booked. The Spanish entity must pay EUR 2.3 million of payroll at 10:00 CET tomorrow and holds EUR 1.0 million on its own account. Spanish law prohibits a debit balance on that account, and the bank's same-day EUR cut-off is 15:30 CET. Group policy requires a minimum EUR 10 million liquidity buffer, and intercompany loans must have a 30-day minimum term with transfer-pricing documentation. A EUR 5 million term deposit at another bank matures in two days.
1. Determine the group's true available liquidity for T+1 and recommend how to fund the Spanish payroll, naming the instrument and the timing constraint.
Read the worked answer
Reconcile before funding. The TMS figure of EUR 14.2m is optimistic: the EUR 1.8m returned debit has not yet been reversed in the TMS, and the EUR 0.2m of charges is unbooked. True available cash is therefore 14.2 - 1.8 - 0.2 = EUR 12.2m, which matches the portal (11.6 + 0.6 in-transit receipt) once the value-dated receipt is recognised. Treat the EUR 0.6m as confirmed but not good funds for the whole of T; do not spend against it if the bank will not make it available intraday.
Policy buffer of EUR 10m leaves only EUR 2.2m of discretionary headroom, and the payroll needs EUR 1.3m of external cash (EUR 2.3m less EUR 1.0m already on the Spanish account). The EUR 5m term deposit is not a solution: two days' notice means it cannot settle T+1.
Critically, a transfer between group entities does not consume group liquidity - it only moves it - so the buffer is not breached by funding Spain, provided the source account has a genuine surplus. Instruct a same-day transfer of EUR 1.5m from the German pooled account to Spain by 14:30 CET (allowing an hour before the 15:30 cut-off), booked as an intercompany loan. Because of the 30-day minimum term, draw under a pre-approved master loan agreement rather than inventing a one-day arrangement; if no master agreement exists, this is the gap to fix before month-end, not during it.
2. Explain how the returned direct debit and the in-transit receipt should be treated in the cash position, and what control weaknesses the break reveals.
Read the worked answer
The returned direct debit is the dangerous item. It was posted to the ledger at value date T-2, so the TMS carried it as paid for two days while the bank had not settled it. That is phantom cash: the treasurer could have spent against money that never left. It must be reinstated at the reversal date and the supplier contacted to establish whether the return was a mandate or funds issue, because an unpaid critical supplier creates a second exposure.
The in-transit receipt should be positioned on value date, not credit date. The conservative convention is to include it in the forward view from T+1 but exclude it from immediately available cash, otherwise the position is overstated by the full EUR 0.6m for one day.
The break exposes three weaknesses. First, positioning relies on a single overnight file with no intraday statement (MT942/camt.052), so intraday reversals are invisible. Second, there is no value-date-based reconciliation or break log with escalation thresholds. Third, there is no monitoring of direct debits before the debit date. Practical fixes: request intraday statements for all pool accounts, run a daily break report with any item above EUR 250k escalated to the treasurer, accrue bank charges monthly, and make the Spanish entity confirm its own spendable balance before payroll runs. A break that is explained after the payment is made is a control failure, not a reconciliation.
3. The Spanish entity proposes rolling its intercompany loan weekly instead of taking a 30-day term. Assess the implications and give your recommendation.
Read the worked answer
Weekly rolling looks cheaper and more flexible, but it conflicts with policy and creates three risks. Legally, each roll is a new advance; if a rollover fails to settle on a Friday because of a cut-off or a funding gap, the Spanish account goes into an unauthorised debit position, which local law prohibits and which the bank may report. In transfer-pricing terms, a series of short loans must still carry an arm's-length rate; a rolling structure without a documented benchmark invites challenge, and in some jurisdictions repeated short-term funding can be recharacterised as equity. Operationally, weekly rolls multiply settlement risk by roughly 52 events a year, each requiring cut-off discipline.
Recommendation: use a 30-day intercompany loan under the existing master agreement, priced at a reference rate plus a documented margin consistent with group TP policy, with monthly rather than weekly settlement. If genuine flexibility is required, ask the bank to run target balancing on the Spanish account so that a defined target balance is swept overnight, removing the manual roll entirely. That converts a policy exception into a standing, documented mechanism with clear limits. Reserve rolling loans for a documented short-term bridge and log every rollover with the reason and the approval.