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NYS Comptroller

THOMAS P. DiNAPOLI

The Academy for New York State's Local Officials

Cash Management: A Tutorial for Local Governments and School Districts

Module 3: Maximizing Interest Earnings

Understanding Balances

You can make this account analysis work for you. The key figure to look at is the excess balance. But first, you need to understand how banks charge for services. A balance is not simply a balance. There are several different "balances":

  • Ledger balance is the book balance or the dollars in the account.
  • Available balance is the ledger balance less the float.
  • Investable balance is the available balance less a 10% reserve requirement.
  • Excess balance is the investable balance less the required balance for services.

So while you may have a ledger balance of $100,000, the investable balance will be less — in the example below, it is $70,000. But remember that some of this investable balance is used to offset the cost of services, so the balance that could be used to earn interest is less than that.

Ledger Balance (Book Balance) $100,000
Less Float $(20,000)
Available Balance $80,000
Less Federal Reserve Requirement (10%) ($10,000)
Investable Balance $70,000
Less required balance for services ($50,000)
Excess Balance $20,000

The simplest way of managing the compensating balance requirement for your checking accounts is to do away with the compensating balance idea altogether and just pay your bank directly for service charges. Admittedly, the idea may seem drastic to some of you. It may be difficult to convince your governing board at budget time to increase budgeted appropriations to fund these costs, because the concept of using compensating balances has been around for a long time. However, by selecting this option, more money may be available for investment, with earnings potentially surpassing bank service charges.

  Next: Examining the Possibilities