A primer on cash management

Abstract

This paper considers successful cash management, which involves not only avoiding insolvency but also selecting appropriate short-term investment vehicles and increasing cash on hand to improve an investor’s cash position and profitability. The paper discusses the following: the term ‘cash management account’ refers to a type of account offered by brokers, dealers and other financial institutions. This type of account combines a brokerage account with a checking account. Broker-dealers have either their own information technology infrastructure or leverage their custodian’s IT infrastructure to provide cash management facilities to their clients. There are two broad products under the cash management service:

•Automated cash management, which provides automated sweep facilities for short-term investment.
•Asset management account, which provides retail-banking facilities for using the free cash, along with the sweep facilities.

A sweep account is a bank account that automatically transfers amounts that exceed, or fall short of, a certain level into a higher interest-earning investment option at the close of each business day. Commonly, the excess cash is swept into money market funds or Federal Deposit Insurance Corporation (FDIC) deposits. FDIC is a federal institution that offers sovereign deposit options.