Managing Cash Flow

Bank Issues and Concerns 29
• Checking or demand deposit accounts. Checking accounts, direct payroll
deposit accounts, zero-balance accounts, wire transfer services, online
access, and the like
• Cash management services. Lockboxes, sweep accounts, check reconciliation,
automatic investment of excess cash, and the like
• Investment services. Treasury bill purchases, Eurodollar investments,
commercial paper purchases, REPOs, bankers’ acceptances, and the like
• Other services. Credit cards, money orders, retirement account management,
safe deposit boxes, trust and investment services, estate planning
assistance, travelers’ checks, and the like
Understanding these services is part of the cash manager’s responsibility in
order to ensure that necessary services are available from the banking institution
and that unnecessary services are not being charged for as part of the cost of bank
services. Any bank can provide virtually any service, if not directly, then through
correspondent bank relationships. For the occasional need, use of a correspondent
bank is appropriate; but if the service is required on a regular basis, then it should
be provided directly by the company’s own bank. Paying for those services is
appropriate, but paying for services that are not used is an unnecessary cost that
should be avoided.
Bank Costs
In considering the use of these banking services, the company must recognize that
there are costs associated with each. The bank will charge for any of these services
that are used, one way or another. The service charges may be itemized monthly
and charged directly to the account as service charges or fees; or they may be
covered by the implicit earnings on non-interest-bearing accounts. Normally, if
the account is not charged directly for such bank services, this means that balances
are large enough to cover the costs of these services, which means that bank balances
might be higher than necessary. Therefore, many companies prefer to maintain
their excess funds in interest-bearing accounts and pay for service charges
directly. This allows them to maximize their interest income and keep detailed
track of the cost of bank service charges. Others prefer to maintain a sufficient balance
in non-interest-bearing accounts to cover any service charges. The cash manager
must select the option that best meets the company’s needs.
Compensating balances are another way banks get paid for providing services.
The earnings to the bank from these non-interest-bearing balances can be
considerable and can cover quite a number of services. Typically, the account officer
will look at the overall yield to the bank from the company’s accounts to determine
whether it meets bank profitability guidelines. This is done by comparing
the costs of all services rendered, including interest payments on operating
accounts, to the total dollars on deposit to see if the bank’s earnings on the
deposits offset the costs of services rendered and interest paid and generate an