Check into cash

Three methods figure into cash concentration schedule - Treasury Management - column

The method and timing of concentrating corporate funds from depository and lockbox banks usually is not given much thought by a healthcare financial manager. Some financial managers do not have to concentrate cash because they use only one bank. Meanwhile, financial managers will multiple banking relationships often feel that concentrating cash is not worth their time.

But effective cash concentration can yield bottom line savings to a facility if a financial manager carefully analyzes:

* Concentration methods used;

* Cost of the methods from depository and concentration bank perspectives;

* Frequency of concentration; and

* Compensation required by the depository bank for services provided.

Concentration methods. Three methods used to concentrate funds are depository transfer checks (DTCs), wire transfer, and automated clearinghouse (ACH).

A DTC is similar in appearance to a personal check, except:

* "Depository Transfer Check" is printed across the top center of the check's face;

* No signature is required; and

* A DTC usually is printed in the evening by the concentration bank.

A concentration bank prints one DTC for each deposit location using a high-speed printer. Every day, facility managers provide daily deposit totals to an automated deposit reporting service that transmits the data electronically to a bank to create a DTC.

Automated clearinghouse. DTCs currently are used only by 20 percent of all companies to concentrate funds, while ACHs are used by more than 70 percent of all companies. ACH transfers are more popular than DTCs because:

* ACH transfers are easy to prepare;

* At less than 50 cents per transaction, they are the least expensive cash concentration method, compared to more than $1 for each DTC and $6 to $10 per wire transfer;

* They are electronic; and

* They guarantee next-business-day availability in a concentration account, while DTC availability can take up to two business days.

ACHs came into use as a concentration tool in 1983. Earlier, DTCs and wire transfers were the only methods available. Because it has many advantages over a DTC, using an ACH is the concentration method of choice among financial managers. Nonetheless, DTCs still must be used if a depository bank is not in an ACH network and cannot handle ACH credit.

Wire transfers. A third concentration method is wire transfer. Wire transfers should be considered in three circumstances:

* If immediate funds are needed in

concentration account;

* If the dollar amount of funds to be transferred is large enough to offset a $16 roundtrip wire charge (both the sending and receiving bank charge for a wire transfer); or

* A local facility inadvertently has built up an excess balance in an organization's account.

financial managers should perform a cost-benefit analysis to determine the break-even point for concentrating cash by wire transfer (assuming funds could be used at a concentration bank for financial advantage, such as investment). The cost-benefit analysis formula is:

Wire transfer dollar value = Cost of roundtrip wire transfer / (interest rate / 360)

For example, if a roundtrip wire transfer costs $16, and the interest rate is 6 percent, the wire transfer dollar value would be:

16 / (.06 / 360) = $96,038

As a result, unless the amount to be transferred is at least $96,000, using a wire transfer is not cost-justified. Transferring money from lockbox banks by wire usually is a wise move because dollar amounts tend to be high, but moving low balances is more effectively accomplished through an ACH.

Frequency of concentration. Cash concentration need not be done daily. Concentration frequency should be determined by dollar amounts to e transferred, the average daily deposit size, and the compensation required by the depository bank. Compensation can be determined by reviewing an "account analysis" statement. Leaving excess balances in depository banks provides no benefit.

Generally, lockbox accoutns should be concentrated daily using wire transfers or ACHs, and depository accounts should be cleaned out between one and three times per week by ACH. A financial manager must look at an organization's individual situation to determine its optimal concentration strategy.

Leslie N. Masonson, CCM, is president of Cash Management Resources, a cash management consulting and training firm in Monroe, N.Y., and the author of Cash, Cash, Cash: The Three Principles of Business Survival and Success. Readers' comments and suggestions for future columns are encouraged and can be addressed to Leslie N. Masonson, CCM, Cash Management Resources, 20 McGarrah Road, Monroe, NY 10950.