Managing Cash Flow

66 Managing Cash Flow—Receipts and Disbursements
Bank Accounts
A key factor in determining what kind of disbursements system to establish for
the company is to understand the amount of its disbursements and the balances it
needs to service transactions, to cover transaction costs, and to meet compensating
balance requirements. This will allow the company to calculate any excess balances
it is able to generate and the amount of earnings potential they represent.
This information will enable the cash manager to make intelligent estimates of the
advantages and disadvantages of available systems.
Some of the types of bank accounts available include the following:
• Demand deposit accounts. These accounts are the basic no frills checking
accounts that have been the staple of bank business for many years. A
number of years ago, banks began paying interest on these checking
accounts in certain instances. However, according to federal regulations,
banks may not pay interest on corporate business checking accounts.
• Imprest accounts. These are accounts with fixed, usually small, balances
that are reimbursed as checks are drawn against them. For example, payroll
accounts, small vendor payment accounts, travel expense reimbursement
accounts, and the like are appropriate.
• Zero balance accounts. These accounts are zeroed out, usually daily, by
transferring any remaining balances to a concentration account, or by
transferring from a concentration account sufficient funds to cover the
checks that have been presented for payment. The transfers between the
concentration and zero balance accounts can be handled automatically by
the bank or by specific company authorization. These are also referred to
as sweep accounts. Vendor payments are an appropriate use for zero balance
accounts. A schematic appears in Exhibit 2.12.
• Automatic balance accounts. These accounts have receipts and disbursements
processed through them and are automatically closed out daily to
an agreed-upon amount by the bank by transferring money to or from an
interest-bearing account. Automatic balance, zero balance, and imprest
accounts are basically variations of the same theme.
In addition to the preceding types of accounts, there are other variations that
have been established by banks to service their customers and try to gain a competitive
advantage. If the company has a particular situation to deal with, it would
probably be to its advantage to talk with the bank and some of its competitors to
see what could be done to solve the problem or take advantage of the opportunity.
The competitive situation in the banking and financial services market provides
a real opportunity to develop creative solutions. In the development of
effective systems to meet company needs, a disbursements system that maximizes
the earnings potential of discretionary funds is necessary to minimize balances in
non-interest bearing accounts and consolidate funds for maximum yields.