The FDIC & Your Business' Cash Assets: The Strategy You Need
Updated: 4 days ago
Do you know where you cash is going?
How much idle cash does your business have? Do you invest this idle cash?
And what happens to your cash if your bank goes under?
Cash management is a critical strategic focus area for your business. If you run-out of cash, you may have to shut the doors.
You must have structure. You must have controls in place. You must have a plan.
Let’s break this down.
The Bank Account Structure
A growing business needs more than a simple checking account. I’ll go one step further and say ALL businesses need more than just a simple checking account.
There are several reasons why you must be more strategic with your bank account structure. We’ll cover the following in more detail:
Limiting your exposure to bank losses
Earning a return on your excess cash balances
Greater control over cash collection and disbursements
Protection against fraud, theft, and employee errors
Deposit Insurance
Shortly before writing this post, there was panic across the US financial sector (and the broader economy) as Silicon Valley Bank (SVB) collapsed.
Fortunately for the bank’s depositors, the Federal Government stepped in to fully guarantee all customer deposits.
However, this is an exception and not the rule.
Most deposits are only insured up to $250,000. If your bank collapses and you have a balance of $245,000, no problem, you are completely covered.
However, if you were sitting on a balance of $1,000,000, you are still only covered for $250,000. There is a good chance that you do not see the remaining $750,000 again.
A few more details:
The insurance is provided automatically if your bank is a member of the FDIC (Federal Deposit Insurance Corporation)
Per the FDIC site, “The standard insurance amount is $250,000 per depositor, per insured bank, for each account ownership category”
If you have one account at one bank with a $1,000,000 balance, you are insured for $250,000
If you have four separate accounts, each with a $250,000 balance, in four separate banks, you are fully insured for your $1,000,000 total
Note: This is a very brief overview of the FDIC insurance. Please consult with your financial institution for complete information.
The Structure
While the exact account structure may vary based on company size and complexity, it should mirror something similar to the structure in the graphic above.
Let’s look closer.
Sweep Account
The sweep account acts as an intermediary account between the concentration accounts and the asset management account. Both of these are explained below.
Excess cash from the concentration account is swept (transferred) daily into the sweep account. Excess cash from the sweep account, above any defined threshold, is then swept into the asset management account.
These sweeps are automated and provide the business an opportunity to earn a return (interest) on any idle cash balances.
This process also provides the business additional insurance coverage over its cash assets. Remember, the $250,000 FDIC limit applies to each different account type.
Concentration Accounts
Concentration accounts are used to aggregate funds from numerous accounts, or locations, into one centralized account.
This simplifies the cash management process as all cash for disbursement, or cash received, ultimately flows through one account.
The concentration account will have either a required minimum balance set by the bank, or a threshold balance that the business sets.
At the end of each day, the following occurs:
Any excess amount of the threshold balance is transferred to the sweep account
If the balance is below the required threshold balance, the shortfall amount is transferred from the sweep account
Zero-Balance Accounts
As the name indicates, zero-balance accounts (ZBA), intentionally carry a zero balance.
Each ZBA serves a specific purpose. The account could be set-up to collect payments from customers, or it could be for submitting payment to vendors.
The number of ZBA accounts will vary based on the size and complexity of the business.
The purpose of having these accounts is to avoid having idle cash balances spread across the business. With the daily automated transactions, idle cash is swept up through the concentration account.
The use of ZBA accounts also promotes risk mitigation. The business has greater control over where cash balances lie and also reducing the risk of prohibited spending.
Balances in the accounts receivable ZBA accounts are swept daily into the concentration account.
Funds are transferred from the concentration account to the payables ZBA accounts to cover planned payments for the coming day.
Asset Management Accounts
Idle cash does nothing for your business.
While you may not wish to tie-up this cash into long-term investments, there are short-term alternatives that provide a return without exposing your assets to unnecessary risk.
The most common option for smaller businesses is a money market fund.
A money market fund is a mutual fund that invests in low-risk, short-term, debt securities.
While there are various other short-term options available (T-Bills, corporate bonds), the important things is that your business has an allocation strategy in place.
As funds are transferred into the account from the sweep account, they will be allocated based on this strategy.
Controls
Establishing a sound bank structure is the first part of your cash management solution. You must also implement strong internal controls to prevent any intentional fraud, or unintentional errors.
Your cash management internal controls should include:
ACH Filters - With ACH filters, only transactions from approved vendor and customer accounts are able to post to your account
Dual Administration - Your cash management process should not be left in the hands of one person. This creates serious control risks
Wire Approvals - Wire transfers must receive approval from someone other than the wire preparer
Positive Pay - Positive pay is an automated cash-management service. The bank matches checks issued by your business with those presented to the bank for payment. Anything considered suspicious is sent to company for examination
Wire Limits - Approval limits must be in place for all wire transfers. There should be increasing thresholds with higher management seniority required for each approval level
Training - All employees should be educated on how to identify fraud. Those directly involved in the cash management process must understand the different accounts and why we have the structure in place
Cash Management - A Recurring Process
Cash management is an ongoing process.
Setting-up the a robust account structure with strong internal controls will set you business on the right path.
But it does not end here.
In future posts, I’ll outline the ongoing process your business must follow along with the tools you can use.
Now, Let's Get Going!
Let’s briefly recap what we have discussed:
Cash management is a critical strategic focus area for your business
If you run-out of cash, you may have to shut the doors
ALL businesses need more than just a simple checking account
The account structure should include a sweep account, concentration accounts, and ZBAs
Excess cash should be invested in low-risk, short-term, debt securities
Cash management is an ongoing process
If your business has growth aspirations, you need the added expertise that comes with adding a CFO. A Fractional CFO offers you the flexibility to scale this added skillset to match your business growth.
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About Colin Murray
Colin is an experienced finance executive with over fifteen years of diversified experiences for companies spanning multiple industry segments and ownership structures. Colin has built a career on transforming finance teams into business partnering organizations with a focus on continuous improvement.
Prior to founding Your Weekly CFO, Colin was the CFO of a private-equity backed manufacturer. Previous roles including heading finance for multi-national business units of public companies.
Colin has bachelors degree in finance from Miami University and an MBA from The University of North Carolina at Chapel Hill.
About Your Weekly CFO
Your Weekly CFO is a boutique CFO Advisory Services Firm specializing in Finance Performance Improvement (FPI). FPI allows clients to extract maximum value from their existing business while increasing projected returns on future business through strategy alignment, and people and resource development