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Cash Management Best Practices
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amount for each check, above which the bank will not honor the check. By limit-
ing the amount per check and the number of checks, this control effectively
resolves any risk of a major fraud loss by consolidating all bank accounts. This is
also an effective approach when acquiring another company, since its bank
accounts can be merged into the existing account. In both cases, reducing the
number of accounts also makes it much easier to track the cash balances in each
account. Thus, account consolidation is an effective approach for improving
accounting efficiency as well as the management of cash flows.
There are some problems to consider before consolidating bank accounts.
One is that there may be automatic withdrawals taken out of an account. If the
account is closed down and merged into a different account, the automatic with-
drawal will be terminated, resulting in an unhappy supplier who is no longer
receiving any money. To avoid this problem, the transactions impacting each
account must be reviewed to ensure that all automatic withdrawals are being
shifted to the consolidated account. Also, there are legal reasons for keeping
some accounts separate, such as a cafeteria plan account, into which employee
deductions are deposited and from which a plan administrator withdraws funds.
Finally, consolidating too many bank accounts may result in a very difficult bank
reconciliation chore. Sometimes it is easier to keep a small number of separate
accounts, just to make the reconciliation process somewhat easier to untangle and
resolve. However, with the exception of these few cases, it is generally possible
to reduce the number of a company’s bank accounts to a bare minimum, resulting
in greater efficiency and more cash available for investment.

Cost: Installation time:

6–5 IMPLEMENT AREA-CONCENTRATION BANKING

Perhaps the greatest cash management problem, especially for a company with
many locations, is what to do with a multitude of bank accounts. When trying to
find a way to invest excess funds most efficiently, it is necessary to call all banks
with which a company has an account, check on the balance in each account,
determine how much of that amount can be safely extracted for investments with-
out increasing the risk of having a presented check bounce due to a lack of funds,
shift the excess funds to a central account, and finally invest it in an interest-bear-
ing account of some kind. To conduct this much work every day may take up all
of the time of several people, depending on the number and location of accounts.
A tedious chore indeed, and one that may take up the largest proportion of the
cash management staff’s time.
The best way to avoid all of this work is to create an area-concentration
banking system. This best practice automatically shifts funds from outlying bank
accounts into regional accounts, from which the cash management staff can
invest funds more easily. Under this arrangement, a company’s bank is asked to