Cash Management

Cash Management Tools to Maximize Cash Flows & Returns

Cash management involves more than monitoring cash flow to insure funds are available for normal business operations. A business owner who dwells only on operating profits is losing out on other ways to maximize the opportunities available to business. Returns from owning a business are improved from the acceleration of cash receipts and the opportune investment of idle cash. Clearly, cash is another asset that can contribute to the profits of the business and maximize owner’s wealth.

Many banks offer a wide range of sophisticated cash management services to commercial accounts, no matter how big or small. Banks actively promote a full array of services designed to help reduce the time and effort required to accelerate cash flow and optimize returns on idle cash.

Banks will work with quality business customers to help them achieve a good return on excess funds. By providing this service, banks develop a strong relationship and hope to retain the checking accounts, investment accounts, and bank loan requirements of a business.

Cash Float

Cash float is an interval of time measured by analyzing cash available in the accounting records and the actual bank account. Cash float is caused by:

• The amount of funds represented by checks that have been written but not yet presented for payment by the payee to the bank.

• The time between when checks are deposited in a bank account but the bank’s clearing policy does not make those funds immediately available.

For example, a check is issued and mailed. The writing of the check creates an immediate accounting entry that reduces the bank balance in the accounting records. However, there will be a delay when the check is actually deducted by the bank because of mailing time, deposit time by the recipient, and the check clearing process. This type of float is called a payment float or disbursement float.

An example of a collection float is when a business receives a check, enters it in the accounting records, increases the cash balance and then deposits the check at its bank. The funds from these deposited checks are not available until they go through a clearing process.

The net float is the difference between collection float and payment float. A very experienced financial person could "play the float" to maximize returns. To achieve maximum benefits of cash float, three areas should be examined:

• mail float
• processing float
• clearing float

Banks are offering more services to larger customers to achieve maximum efficiency regarding cash float.

Acceleration of Cash Deposits

Depending on the size and credit rating of a business, many banks will work with a company to help it collect cash on a timely basis. One popular method to accelerate the collection of cash is a lockbox system. Under this system, customers mail their payments to the company’s bank which are immediately entered as a deposit. The mailing address does not reveal to the customer that their payments are mailed to a bank. The bank prepares a list of the deposited checks and sends it to the company who can then update their accounts receivable.

Management of Excess Funds

Excess funds should not remain in a checking account because business checking accounts do not earn interest. Personal checking accounts that do pay interest usually offer a rate quite lower than other alternatives like savings accounts, money market funds, or government securities such as bonds or treasury-bills (T-bills). Excess funds can be easily switched from a checking account to another cash equivalent alternative and replaced when needed. Some popular methods to invest excess funds with banks are:

• Zero Balance Accounts
• Sweep Accounts

Zero Balance Account (ZBA)A ZBA is a checking account in which the bank maintains a balance of zero for its business customer by automatically transferring funds to and from a master investment account. If deposits exceed checks cleared, the excess funds are immediately invested in government securities or money market funds. When the cleared checks exceed deposits, the bank sells securities or reduces the money market fund to cover the shortfall. A Zero Balance arrangement can minimize idle balances in non-interest bearing accounts.

Sweep Account

Sweep accounts combine a business checking account with an investment account, usually a money market mutual fund. They were devised as a way to get around an old government regulation that prohibits banks from offering interest on commercial checking accounts. A sweep account is a bank account in which the bank automatically transfers funds in excess of a target amount to an investment account at the close of each business day. In essence, the bank "sweeps" excess funds from a checking account to an interest bearing investment such as a money market fund.

Sweep accounts are no longer restricted to only large companies. Banks are now meeting the needs the fast-growing small business and entrepreneurial market.

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