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Cash Management Best Practices
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those whose customers are located within the same state—this simply reflects the
mechanics of the check-clearing process, and cannot be accelerated below a min-
imum level.
Cost: Installation time:

6–9 OPEN ZERO-BALANCE ACCOUNTS

Whenever a company cuts a check to a supplier, it must deposit enough cash in
its checking account to cover payment on the check. If it does not do so, then the
bank may not honor the check when it is presented for payment, or it may
advance payment but charge a fee for doing so. In either case, the penalties are
considerable for not having sufficient cash on hand to cover company obliga-
tions. Many companies run the risk of not having sufficient funds on hand
because they want to earn interest on their money for as long as possible (most
checking accounts do not pay interest, or very little). Accordingly, the typical
organization assigns someone the task of monitoring the rate at which checks are
being cashed, guesses when checks will be cashed, and uses all sorts of time-
consuming averaging methods to make a reasonable guess as to how much
money should be left in the account each day. Not only is this an expensive way
to manage cash, but sometimes those guesses are wrong, resulting in bounced
checks or additional bank fees.
The zero-balance account is a better way. As its name implies, the zero-
balance account requires no balance. Instead, when checks are presented to the
bank for payment, the bank automatically transfers money from another com-
pany account, in the exact amount required to cover the check. This approach
allows a company to eliminate the amount of funds stored in various bank
accounts, which results in the storage of all funds in just one account, where it is
easier to track and invest. There is also no problem with forgetting to manually
transfer funds into the zero-balance account because all transactions are handled
automatically. There is no risk of not having cash available to pay for a check,
unless there are no funds in the account from which money is automatically
being drawn. A common use of the zero-balance account is for payroll checks. A
variation on this type of account is the controlled disbursement account (see the
‘‘Implement Controlled Disbursements” section earlier in this chapter), which is
most commonly used for accounts payable checks. By using either or both of
these types of accounts, a company can consolidate its funds into a central hold-
ing account, where it is both more visible and easily transferred out to various
investment vehicles.
There are few problems with having a zero-balance account. One is that the
bank will charge a small monthly fee for maintaining the account, but this
amount is easily offset by the interest earned on money that would otherwise
have been sitting in the account. In addition, some very small companies with