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Cash Management Service Charges

The cash management portion of the account analysis will vary by bank. Depending on the variety of services used, this section can be several pages long. An illustrative configuration is shown in Exhibit 8.6.

Service
Reference
Quantity

References:

Account maintenance is the fixed charge assessed to cover the bank’s overhead costs associated with a DDA.

Deposits are checks presented for deposit. Unencoded checks do not have the dollar amount encoded in the MICR line; encoded checks have been imprinted by the corporate depositor with the dollar amount using an encoding machine. Encoded checks usually have a lower unit price.

Returned items are checks not honored by the drawee bank, either due to insufficient funds or a stopped payment by the maker.

Checks paid are disbursements written against the account.

ACH debits/credits are automated clearing house debits and credits to the account.

Fedwires are same-day electronic transfers of funds through the Federal Reserve System.

Total charges are the sum of the price extensions for all cash management services.

Net due for services is the difference between total charges and the ECR allowance based on the balances in the account.

Exhibit 8.6: Illustrative Cash Management Service Presentation in Bank Account Analysis Statement
The last line, net due for services, is significant because a company must pay the bank this amount as a fee for cash management products used. Companies are effectively charged in two forms for bank services: the balances left on deposit and the fee for services. In this example, the company pays by leaving an average of $22,000 in collected balances and a fee of $381.

In the Real World: The Real Cost of Leaving Balances

The economic cost of banking is far greater than the explicit charge of $422 (reference 7, in Exhibit 8.6), because the balances left on deposit should be valued at the company’s cost of capital. Assuming 12 percent as the cost of capital, the balances are valued at $220 (12 percent ÷ 12 months x $22,000). With the fees of $382, the total implicit monthly banking cost is $602, about 30 percent higher! The real cost of leaving balances at the bank is so significant that the cash management function should devote a major effort to reducing them to nearly zero.

Taken From : Essentials of Managing Corporate Cash

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