By necessity, many family businesses end up with checking accounts at multiple banks because of remote locations. If there’s only one bank in town, you have no choice but to deposit there! But, all those small accounts everywhere add up to a sizable amount of cash. If this cash sits idle in a non-interest-bearing checking account, a family business can lose significant profit opportunities.
By aggregating all cash at the end of the day into one main account, a family business can either pay down debt or invest, each on a daily basis, saving or earning interest.
Here’s a simple test to determine your company’s cash-saviness:
$ Gather your last six monthly balance sheet statements
$ Record the cash balance from each month.
$ Record the working capital line balance for each period.
$ Compare the two
Any month where there was cash of more than $25,000 and a line balance in excess of $25,000, you were not using your cash wisely and it cost your company money!
There is no good excuse to leave cash sitting in separate accounts. Nor is there a good excuse not to pay down your line.
Next, look at your average cash balance. At a typical borrowing rate of 9.5% interest on a line of credit, here is the cost of your cash mismanagement:
Average
Cash Balance Annual Cost
$100,000 $9,500
$150,000 $14,250
$250,000 $23,750
$400,000 $38,000
$600,000 $57,000
$750,000 $71,250
If you are like most small businesses, you are likely losing $10,000 to $70,000 per year in unnecessary bank interest by not aggregating your cash and paying down your bank line. You may really like your banker, but he or she is not worth this kind of cost!
For some family businesses, cash inefficiency is not due to multiple locations, but due to too many checking accounts at the same institution. This cash problem is even easier to correct since the bank can easily move all funds into one account at the end of the day.
