Physical sweeping definition
/What is Physical Sweeping?
Physical sweeping is the movement of cash from multiple bank accounts into a single concentration account. This is typically accomplished with a zero-balance account, from which a bank automatically sweeps all cash at the end of the day, and into a concentration account. If the zero-balance account has a debit balance at the time of the sweep, then the funds are shifted from the concentration account back into the account having the debit balance, until its balance is zero.
It is also possible to maintain a predetermined minimum balance in a subsidiary account, so that only cash levels above the designated level are swept into the concentration account.
Advantages of Physical Sweeping
There are several advantages to the use of physical sweeping, which are as follows:
More efficient investing. The concentration of cash results in more efficient investment activities; it may also allow a business to obtain a higher rate of return on its investments.
Less risk of loss. Moving cash out of outlying accounts eliminates the risk of fraud losses from these accounts, though you will need to impose strong controls over the concentration account in which the cash is stored.
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Example of Physical Sweeping
Robust Corporation operates in three different regions and maintains separate bank accounts for each location. The accounts are as follows:
Account A. Used for operations in the East region.
Account B. Used for operations in the West region.
Account C. Used for operations in the Central region.
At the end of each day, the bank automatically transfers the balances from Account A, Account B, and Account C into a single concentration account that is managed by the company's headquarters.
The account balances on a recent day are as follows:
Account A: $10,000
Account B: $15,000
Account C: $20,000
The bank executes a physical sweep, transferring all these balances into the concentration account. The total in the concentration account is now $45,000.
By centralizing funds, Robust Corporation can manage its cash more effectively, invest excess balances, or reduce borrowing costs. This transfer is physical because the actual funds move between accounts, as opposed to a notional sweep where only the balances are notionally pooled without moving the funds.