Accounting Best Practices, Fifth Edition

6–8. 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 obligations. 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 company account, in the exact amount required to cover the check. This approach allows a company to store all funds in just one account, where it is easier to track and invest. There is also no problem with forgetting ...