A zero balance account is a specific type of bank account that allows a business to manage cash flow more efficiently. A zero balance account is usually linked to a main savings account, and funds are transferred automatically between them to maintain a zero balance at the end of each day.

By doing this, the business can avoid paying interest or fees on their funds. It also reduces the risk of going into overdraft or having insufficient funds. Zero balance accounts are especially useful for businesses that have multiple subsidiaries or branches. This way they can consolidate their cash management and potentially simplify their accounting processes.

For instance, some consumers need to save their money for the long term, preferring to stockpile it rather than spend it. For these people, an interest-yielding savings account is the best option. Depending on the exact type of savings account that they open, these consumers will generally be able to withdraw money for emergencies or special purchases without incurring a penalty or fee.

What are the benefits of a zero balance account?

The way a zero balance account (ZBAs) is structured allows businesses to manage their cash flow more efficiently. In some cases it can even help reduce borrowing costs. A ZBA has a balance of zero at the end of each business day because any left over funds in the account are automatically transferred out. This can help the company earn more money for their bottom line while keeping open an account that is used solely for the purpose of making payments. Here’s some of the benefits of using a ZBA:

• – Improved cash management: ZBAs enable businesses to consolidate their funds in a single master account.  This allows them to use the main account for investing, paying down debt or covering everyday expenses. This streamlines processes by eliminating the need to manually transfer funds between multiple accounts. This also provides a clear picture of the business’s cash position at any given time.
• – Reduced borrowing costs: ZBAs can also help businesses to avoid paying interest on excess balances. They can also avoid overdraft fees on insufficient balances, as any surplus or deficit is automatically offset by the master account. This can save a significant amount of money in the long run if they have multiple accounts with different banks or interest rates.
• – Simplified accounting and reconciliation: ZBAs can make it easy for businesses to track and reconcile their accounts. This is because they only have to deal with one master account instead of multiple sub-accounts. This can reduce the risk of errors, overpayments or fraud. It can also save time and resources for the accounting staff.

Another benefit using a zero balance account for a company is that their record-keeping capabilities improves and, with it, their ability to better supervise employee expenditures. Many employees are issued company cards, and if they were to attempt a purchase with a running balance it would process without delay. However, an account without such a balance would need to have every expense pre-approved or else it would automatically decline. In this way, a zero balance account gives management a way to reel in costs while giving their accounting departments the tools necessary to track expenses.

What are the drawbacks of a zero balance account?

While zero balance accounts can offer a range of benefits, such as those above, they also come with some potential risks or drawbacks that should be taken into consideration.

One of the main drawbacks of ZBAs is that they require a high level of coordination and communication between the main account and the subsidiary accounts. If there is a mismatch between the funds transferred it can result in overdraft fees, insufficient funds fees or even delayed payments. For example, if a secondary account has an unexpected expense, there may not be enough funds to cover it until the next transfer from the main account. On the other hand, if a secondary account gets more funds than expected, there may be excess funds sitting there doing nothing until they are swept back to the parent account.

Another drawback of these types of accounts is that they may not be suitable if your business operates in different currencies or countries. Because there’s frequent transfers of funds between accounts, they may cop foreign exchange fees, tax problems, or even regulatory issues. For example, if the two accounts are in different countries they may face the problem of currency fluctuations. This could then affect its cash flow, margins and profitability. Some countries may not even offer zero balance accounts.

How to set up and manage a zero balance account

Setting up and managing a zero balance account is not difficult or costly. You’ll need to have a main account and sub-accounts with the same bank. You’ll also need to sign an agreement with your bank so that the automatic transfers between the accounts are authorised.

Depending on who you bank with, you might have to pay a monthly fee or a fee per transfer. But the good news is that these fees won’t be as much as the penalties or interest from an overdraft account.

So should you open a zero balance account?

These accounts can help with your monthly cashflow by automatically transferring funds from a master account to secondary accounts, they can help businesses pay their bills on time, avoid overdraft fees, and earn interest on funds like a savings account.