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Cash Sweeping

Cash sweeping occurs when a company sets up a zero-balance account and its bank automatically moves cash from that account into a concentration account, usually within the same bank.  The cash balance in the zero-balance account (as the name implies) is reduced to zero whenever a sweep occurs.  If the account has a debit balance at the time of the sweep, then money is shifted from the concentration account back into the account having the debit balance.

It is also possible to use constant balancing to maintain a pre-determined minimum balance in a subsidiary account, which involves sweeping only those cash levels above the minimum balance, and reverse sweeping cash into the subsidiary account if the balance drops below the minimum balance.

Daily sweeping may not be necessary outside of a company’s designated core currencies.  This is especially likely when non-core currency account balances are relatively low.  If so, it may be more cost-effective to sweep them less frequently, or to implement trigger balances.  A trigger balance is an account balance level above which excess funds are swept out of the account.

Some concentration banks can also monitor a company’s account balances at third-party banks using SWIFT messages, and create transfer requests to move excess cash to the concentration bank.  The key point with account sweeping is to fully automate it – the effort involved in manually tracking account balances and shifting funds on a daily basis is not only expensive, but also likely to cause errors.

In most sweeping transactions, the sweeps occur on an intra-day basis, which means that balances are transferred to the concentration account before the end of the day. Consequently, some cash may be left behind in subsidiary accounts, rather than being centralized.  This occurs when cash arrives in an account after execution of the daily sweep.  The cash will remain in the subsidiary account overnight, and be included in the following day’s sweep. If a bank can accomplish true end-of-day sweeps, then no cash will be left behind in local accounts.  If a company is not dealing with such a bank, then a proactive approach to depositing checks before cut-off times is the best way to avoid unused cash.

There may be a need to track the amounts of cash swept from each zero-balance account into the concentration account; if so, the company records an inter-company loan from the subsidiary to the corporate parent in the amount of the cash transferred through the cash concentration process.  This is useful for reporting cash on subsidiary-level balance sheets, and allocating interest income and expense to subsidiaries.

Some banks have the capability to track the amount of balance sweeps from each subsidiary account on an ongoing basis, which a company can use as its record of inter-company loans.

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