“Getting Control of Your Cash”

When it comes to cash management, do any of the following scenarios sound familiar to you as a business owner?

• You keep as much money as possible in the checking account, because you don’t know how much cash you may need at any particular time to cover your expenses, and you don’t want to come up short. 
• Your investment strategy is to deposit cash and checks into the checking account until you save enough to write a check for deposit into a money market fund, CD or Treasury bill. 
• Your method of borrowing is to estimate how much you’ll need for equipment, cash flow and other special needs, then tack on several thousand dollars extra, for good measure, each time you present a loan request. 
• Come payroll or tax time, you withdraw money from your money market account and deposit it into your checking account, allowing a few days for the transfer and another few days to make sure your check arrives by your filing date.

If you fit any of these descriptions, you’re probably wasting valuable time and money. Cash management based on guesswork can cost your business significant sums of money. You could make management of your business cash easier and more effective — and perhaps save money as well — by establishing a single, comprehensive system that does much of the work for you automatically.

CENTRAL ASSET ACCOUNTS

When businesses want to simplify their business cash arrangements, most look to what is called a central asset account or asset management account. This kind of account is offered by most brokerage firms and combines checking, investing and borrowing in a single account.

Here’s how a central asset account works. Depending on the options chosen, the account might consist of a checking account, a money market fund, a line of credit and a brokerage account. The separate functions are linked, and transferring funds between accounts is automatic, which eliminates paperwork and check writing delays.

Funds can enter your account in a number of ways, including deposits, electronic funds transfer, federal funds wire, credit card and computer-based collection systems. Disbursement of funds can also be by check, funds transfer, wire, credit card or computer-based transfer systems.

Incoming funds go to one of two places. For account holders with no outstanding loan balances, incoming funds are put into a money market fund and immediately start earning dividends until they are needed. For those who have borrowed, the funds are used to pay loan balances first, which minimizes interest expense. Either way, incoming funds are put to use immediately and automatically, so your money doesn’t lie idle at any time.

Outgoing funds come first from the money market account. Until checks or other disbursements clear, however, your money continues to earn dividends. If you overdraw on your money market account, or reach a minimum balance that you set previously, your line of credit is automatically accessed.

With the linked brokerage account, you can also purchase securities with available funds, including money market instruments, mutual funds, stocks and bonds. Access to a variety of short- and intermediate-term securities can help you increase the potential return from your investable cash. Of course, you can sell securities in your account at any time, or borrow against their value to meet working capital needs.

A CASE HISTORY

Let’s take a look at how a central asset account helped one hypothetical business save $16,000 a year. This business owner had an $800,000 line of credit with his bank and an average outstanding loan balance of $500,000. At an interest rate of 10 percent, the business was spending $50,000 a year in interest expense.

Switching to a central asset account, the business’s $800,000 line of credit was linked to its checking account, which had an average balance of $200,000. The checking account balance was used to reduce the average loan balance from $500,000 to $300,000. At the same interest rate, the business owner paid only $30,000 a year in interest.

Even if a central asset account carries an annual fee, the total savings can still be substantial. If this business owner paid an annual fee of $4,000, or 0.5 percent of the $800,000 line of credit, the total annual cost to the business owner would be $34,000 — $16,000 less than the cost of maintaining the bank line of credit.

ELECTRONIC PROCESSING FEATURES

As an employer, you know how time-consuming it can be to make payroll tax payments. Central asset accounts that offer the added benefit of electronic tax payments allow you to process your company’s federal payroll, excise and income taxes directly from the account. Electronic payment can substantially reduce the burden of this responsibility.

Generally, you will have the option of making payments by either telephone or computer. Either way, you receive a confirmation of the transaction by phone and a deposit receipt by mail. The account is debited automatically, and payment and tax information is sent automatically to the IRS.

Retail merchants and service businesses that accept credit cards can also arrange for electronic charge card processing through a central asset account. This eliminates depositing or mailing sales drafts and waiting for checks in the mail. A point-of-sale terminal authorizes, transmits and reconciles your charge card transactions electronically.

GET CONTROL OF YOUR CASH

The bottom line is that a central asset account can help you gain control over your business’s cash. Talk with your financial consultant about how you can decrease the time you spend managing money and make your business’s cash work harder for you. For business owners like you, a central asset account can mean an end to costly guesswork.

About the Writer: G. Stephen Thoma is senior vice president of Merrill Lynch, Pierce, Fenner & Smith Inc. Mr. Thoma is also chairman of Business Financial Services Inc., which provides a comprehensive range of services including cash management, investment, financing, succession planning and employee benefits programs. This article originally appeared in the Summer 1996 issue of Entrepreneurial Edge.

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