Cash sweeping

A cash sweeping system (also known as physical pooling) is designed to move the cash in a company’s outlying bank accounts into a central concentration account, from which it can be more easily invested. By concentrating cash in one place, a business can place funds in larger financial instruments at higher rates of return. Cash sweeps are intended to occur at the end of every business day, which means that quite a large number of sweep transactions may arise over the course of a year.

Cash sweeping can be fully automated as long as a company keeps all of its bank accounts with a single bank, where the bank can monitor account balances. Since several banks now span entire countries, it is not especially difficult to locate banks that can provide comprehensive sweeping services across broad geographic regions.

The Zero Balance Account

One way to implement a cash sweeping system is the zero balance account (ZBA). A ZBA is usually a checking account that is automatically funded from a central account in an amount sufficient to cover presented checks. To do so, the bank calculates the amount of all checks presented against a ZBA, and pays them with a debit to the central account. Also, if deposits are made into a ZBA account, the amount of the deposit is automatically shifted to the central account. Further, if a subsidiary account has a debit (overdrawn) balance, cash is automatically shifted from the central account back to the subsidiary account in an amount sufficient to bring the account balance back to zero. In addition, subsidiary account balances can be set at a specific target amount, rather than zero, so that some residual cash is maintained in one or more accounts.

There are three possible ZBA transactions, all of which occur automatically:

  • Excess cash is shifted into a central account
  • Cash needed to meet payment obligations is shifted from the central account to linked checking accounts
  • Cash needed to offset debit balances is shifted from the central account to linked accounts

The net result of a ZBA is that a company retains most of its cash in a central location, and only doles out cash from that central account to pay for immediate needs.

Sweeping Rules

A number of rules can be set up in a cash sweeping system to fit the cash requirements of the business entity using each account, as well as to minimize the cost of the system. Rules usually address:

  • Frequency. Cash can be swept from some accounts at longer intervals than for other accounts. Some accounts accumulate cash very slowly, and only require an occasional sweep.
  • Threshold sweeps. Cash can be swept only when the cash balance in an account reaches a certain level. This minimizes the cost of initiating sweeps for very small amounts of cash.
  • Target balances. A designated amount of cash can be left in an account to ensure that a certain balance is always available. This may require that cash be sent into an account, rather than the usual outbound sweep. Target balances are useful when day-to-day operating needs are being met locally through an account. For example, a local bank may automatically extract its monthly service fee from an account, and will charge an overdraft fee if the account contains no cash with which to pay the service fee.

Sweep Problems

Cash sweeping is not to be engaged in lightly when cash is being moved among the accounts of multiple business entities, and especially when cash is being moved across national boundaries. Cash sweeping can cause the following problems related to interest:

  • Recognition of interest income. Some local tax jurisdictions will take exception if a business recognizes all of its interest income at the corporate level, since the cash that generated the interest income is located at the subsidiary level. To offset this problem, all interest earned should be allocated back to the subsidiaries based on the amount of their cash that was used to generate the income.
  • Recognition of interest expense. As was the case with interest income, some tax jurisdictions want to see an interest charge recorded against those subsidiaries that required a cash infusion to avoid an overdraft situation. The interest charge should be based on the interest rate paid by the company for its debt; in the absence of any debt, use the market interest rate.