A zero balance account (ZBA) is a type of business checking account that aims to maintain a balance of zero at all times. It is typically linked to a master account that transfers funds to and from the zero balance account when transactions occur.
What is a Zero Balance Account?
A zero balance account is a business checking account that permanently keeps a zero balance by transferring funds to and from a master account. In some cases, a company may choose to set a specific target amount for the zero balance account to always keep some cash on hand – although the goal is usually to maintain a zero balance.
Zero balance accounts are primarily used by businesses that need to maintain separate accounts for payroll, department expenses, and other needs but do not want to manually transfer and monitor funds. Zero balance accounts can help businesses optimize cash flow, eliminate overdraft and incidental fees, reduce fraud risk, cut administrative costs, and review expenses at a more granular level.
How Does a Zero Balance Account Work?
Zero balance accounts can help businesses streamline operations by allowing them to keep most of their funds in a centralized location. This reduces the amount of idle cash they hold and minimizes the administrative costs they would typically incur from manually transferring funds.
You can also think of a zero balance account as a “sub” account, with the master account being the “primary” account. Every time a payment is sent to the zero balance account, that exact amount is transferred from the primary account to the sub-account (much like when your parent gives you $3.71 to buy a gallon of milk from the store). If the zero balance account has a positive balance at the end of the day, those funds are transferred back to the primary account.
In other words, the primary account always holds the money. It only transfers funds to the zero balance account as needed. And when it transfers funds, it is always for the exact required amount – no more.
With zero balance accounts, fund transfers and movements are done automatically. All the business usually needs to do is reconcile the numbers by comparing account figures in bank statements.
Benefits of a Zero Balance Account
There are several specific benefits to zero balance accounts. Here are some notable examples:
Time savings: With the ability to automate transactions, one of the biggest benefits of zero balance accounts is that they eliminate the need to manually transfer and track funds to sub-accounts. This saves the company time and money that it would have spent redirecting funds and tracking balance levels.
Reducing banking and administrative errors: Handling different cash amounts can be confusing. By keeping funds in one master account – and standardizing the process – the company reduces its chances of overdraft, incurring fees, or making administrative mistakes.
Facilitating review processes and expense tracking: Zero balance accounts can help businesses monitor spending at the departmental level, track short-term project expenses, payroll, and more in detail. If an entity is overspending, the business is more likely to catch that using a zero balance account rather than manually tracking funds.
Reducing fraud risk: The more bank accounts you have, the more time you need to spend monitoring them for fraudulent activity. But when you have only one master account that holds the funds, you can reduce your chances of exposure to risk.
Improving
Cash flow: Instead of having small amounts of money sitting idle in various accounts, a zero-balance account allows you to consolidate these funds and use them for investment and financing other business goals.
Providing more control over spending: Since zero-balance accounts maintain a zero balance, purchases using debit cards usually have to be pre-approved before users can make them. This gives the company more control over spending and allows it to establish processes for how purchases will be made.
Zero Balance Account vs. Transfer Account
Zero balance accounts and transfer accounts are both designed to maintain a certain balance by transferring funds to and from the main account. However, zero balance accounts are primarily linked to business checking accounts, while transfer accounts are associated with brokerage accounts.
The following table illustrates further differences between zero balance accounts and transfer accounts:
| Zero Balance Account | Transfer Account |
|---|---|
| A type of business checking account that maintains a zero balance by transferring funds to and from a main bank account | A type of bank or brokerage account that maintains a preset balance by transferring excess funds to a secondary investment account |
| The goal is to maintain a zero balance | The goal is to maintain a preset balance determined by the account holder |
| Usually insured by the FDIC or NCUA | May not be insured by the FDIC if transferred to an investment account |
Source: https://www.thebalancemoney.com/what-is-a-zero-balance-account-zba-5202001
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