Introduction to Corporate Finance

ONLINE CHAPTERS

19-3c DISBURSEMENT PRODUCTS AND METHODS

Zero-Balance Accounts

Zero-balance accounts (ZBAs) are disbursement accounts that always have an end-of-day balance of zero.

The purpose is to eliminate non-earning cash balances in corporate cheque accounts. A ZBA is often

used as a disbursement account under a cash concentration system.

A ZBA is designed as follows. Once all of a given day’s cheques are presented to the company’s ZBA

for payment, the bank notifies the company of the total amount to be drawn, and the company transfers

funds into the account to cover the amount of that day’s cheques. This leaves an end-of-day balance of

$0 (zero dollars). The ZBA allows the company to keep all operating cash in an interest-earning account,

thereby eliminating idle cash balances. Thus, a company that uses a ZBA in conjunction with a cash

concentration system would need two accounts. The company would concentrate its cash from the

lockboxes into an interest-earning account and write cheques against its ZBA. The company would cover

the exact dollar amount of cheques presented against the ZBA with transfers from the interest-earning

account, leaving the end-of-day balance in the ZBA at $0. In many cases, funding of the ZBA is made

automatically and involves only an accounting entry on the part of the bank.

A ZBA is a disbursement management tool that allows the company to maximise the use of float

on each cheque. The company accomplishes this by keeping all its cash in an interest-earning account

instead of leaving nonearning balances in its cheque account to cover cheques that the company has

written. This allows the company to maximise earnings on its cash balances by capturing the full float

time on each cheque it writes.

We have discussed only ZBAs in this section. However, banks offer a variety of similar products.

Another common product that achieves the same goal as a ZBA is a sweep account, in which the bank

sweeps account surpluses into the appropriate interest-earning vehicle and liquidates similar vehicles

in order to cover account shortages when they occur. Many banks also offer multi-tiered ZBAs that may

be used by multidivisional companies or to segregate different types of payments (such as payrolls,

dividends and accounts payable). This type of account allows the cash manager to better control balances

and funding of the master account and associated ZBAs, thus reducing excess balances and transfers.

Controlled Disbursement

Controlled disbursement is a bank service that provides early notification of cheques that will be presented

against a company’s account on a given day. This allows the bank to let its controlled disbursement

customers know as early as possible what will be presented to their accounts. This, in turn, allows

customers to determine their cash position and make any necessary investment or borrowing decisions in

the morning, before the cheques are presented for payment. Controlled disbursement accounts are often

set up as ZBAs to allow for automatic funding through a company’s concentration account.

Positive Pay

Positive pay is a bank service used to combat the most common types of cheque fraud. Given the

availability of inexpensive computers, scanners and printers, it is not difficult to create excellent copies

of corporate cheques or to change payees or amounts. The risk to a company issuing cheques is that the

bank might pay fraudulent items and the fraud would not be revealed until the account is reconciled.

When using a positive pay service, the company transmits a cheque-issued file, designating the cheque

number and amount of each item, to the bank when the cheques are issued. The bank matches the

presented cheques against this file and rejects any items that do not match. It is important to note that

LO19.5

zero-balance accounts
(ZBAs)
Disbursement accounts that
always have an end-of-day
balance of zero. The purpose is
to eliminate non-earning cash
balances in corporate cheque
accounts

controlled disbursement
A bank service that provides
early notification of cheques
that will be presented against
a company’s account on a
given day

positive pay
A bank service used to combat
the most common types of
cheque fraud. A company
transmits a cheque-issued
file, designating the cheque
number and amount of each
item, to the bank when the
cheques are issued. The
bank matches the presented
cheques against this file and
rejects any items that do not
match