Bank On It

February, 2005

For many businesses, higher interest rates can be a double-edged sword. On the one hand, the cost of credit increases. On the other hand, appropriately invested excess cash can have a positive effect on the bottom line, making the management of cash balances an integral part of a company’s overall operations.

Excess cash balances should be invested to:

o Generate additional income

o Reduce interest expense through the repayment of debt

o Offset expenses for additional bank services

To make the most of your cash balances in today’s rising-interest-rate environment, here are a few suggestions to consider for your business:

1) Review your company’s accounts against the different types of accounts your bank offers. Make sure you are using the best type of accounts for your business, that you are maintaining the proper number of accounts needed and that they are structured to operate effectively for your business.

If your accounts are not being analyzed by your bank and you maintain significant balances, talk to your banker about the benefits of account analysis. Through this service, your company will receive an earnings credit based upon its investable balances, which can be used to offset various bank service fees. With account analysis, your company will receive the following benefits:

o Save money – the earnings credit can be used to offset service fees

o Detailed information – a comprehensive list of services used is provided each month

o Flexibility – you can group your accounts in a single analysis relationship so that balances work to offset fees in all accounts

If your accounts are under account analysis, review your analysis statements every month to watch for excess balances. With the increase in analysis-earnings credit rates, you need lower balances to cover your cost of services. Therefore, if you are currently in a break-even analysis position, the higher-earnings credit rates could quickly swing you over to a positive analysis position, resulting in excess, idle balances.

2) Examine your cash-flow timeline with your bank’s cash-management specialist, who can inform you of current techniques, products and services that can help you manage your company’s cash resources more effectively.

You can fine-tune your cash position with the aid of cash-management tools. Services include lockbox, which speed the collection of receivables, Automated Clearing House (ACH) origination and payroll, which control disbursements, and online information reporting, which enables you to monitor cash inflows and outflows to minimize idle balances, maximize excess cash and improve efficiency.

Additional services that are becoming increasingly important in today’s business environment include positive pay for check fraud prevention and ACH debit block to guard against unauthorized ACH transactions.

3) Consult your bank relationship officer or cash-management specialist about a cash sweep account to generate additional income. This service continuously keeps cash working for you by sweeping excess balances into an investment account.

With a cash sweep account, checking-account balances are automatically reviewed at the end of each business day to identify balances in excess of a preset target balance. Excess balances are swept into an investment vehicle such as a money-market mutual fund or other interest-bearing account. When funds are needed to cover transactions, the sweep account automatically moves just enough money back into your checking account to cover the activity.

When setting your target balance, compare the investment funds’ taxable equivalent yield to the analysis-earnings credit rate to determine whether it’s better to keep enough balances in your checking account to cover fees, or to sweep everything into your investment account to maximize investment return and pay bank fees in cash.

A cash sweep account provides the following benefits:

o Simplifies record keeping by having your bank perform automatic transfers

o Increases investment earnings through automatic transfer of excess balances

o Reduces time to review and manage daily cash position

With all of the daily challenges that come with running a business, monitoring cash balances may be low on your priority list. However, just like accounts receivable or equipment, businesses should not over look cash as an asset.

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Dale M. Tanimoto