Physical sweeping, in the context of cash management, is a service offered by many banks. It automatically transfers (or “sweeps”) excess balances from a company’s operating account into an interest-bearing account at the end of each business day. This helps the company maximize its earnings on daily cash assets.
The term “physical” in this context does not mean the sweeping is done manually or involves physical movement of money. Rather, it distinguishes this type of sweeping from “notional” sweeping.
Here’s a simple example:
Let’s say a company named TechCorp has an agreement with their bank for a physical sweep arrangement. At the end of each business day, any amount over $50,000 in their operating account is swept into an interest-bearing account. On a particular day, TechCorp has $70,000 in the account at the end of the day. The physical sweeping process automatically transfers $20,000 into the interest-bearing account, leaving $50,000 (the predetermined target balance) in the operating account.
Physical sweeping is just one part of cash management services provided by banks to help businesses manage their liquidity, ensure funds are available when needed, and maximize earnings on idle cash.
Example of Physical Sweeping
Let’s consider a small business named Bella’s Boutique.
Bella’s Boutique has a current account with their bank, and they’ve set up a physical sweep arrangement with a threshold of $10,000.
- Business Day Transactions: On a given day, Bella’s Boutique’s current account starts with a balance of $11,000. Throughout the day, the boutique makes various transactions, including receiving payments from customers and paying vendors. At the end of the day, the account balance stands at $15,000.
- Physical Sweep: Because the end-of-day balance exceeds the $10,000 threshold, the bank’s physical sweep service automatically transfers $5,000 (the amount over the threshold) from the current account to an interest-bearing savings account. Bella’s Boutique’s current account now has a balance of $10,000, while $5,000 has been moved to earn interest overnight.
- Next Business Day: The following morning, if necessary, funds from the savings account are automatically swept back into the current account to maintain the optimal balance and ensure Bella’s Boutique has sufficient funds for that day’s operations.
- Interest Earnings: The funds in the savings account earn interest for the time they were deposited there, helping Bella’s Boutique maximize the use of their cash resources.
In this way, Bella’s Boutique is able to manage its liquidity effectively while also earning interest on any excess balances. The physical sweep arrangement automates this process, making it easy for the business to maximize the use of their funds.