Zero Balance Account: Definition, Requirements & Examples

KEY TAKEAWAYS

• A zero balance account (ZBA) is kept with a balance of zero by transferring money to and from a master account.
• ZBAs are not consumer products, but are used by larger businesses.
• Multiple sub accounts with a zero balance may be used by an organization to track and monitor spending by project or department.
• ZBAs encourage risk reduction. This is because they give businesses greater control over their cash holdings and the potential for improper spending.
• ZBAs are frequently highly automated. A business must still keep track of and reconcile its bank statements even though this reduces clerical mistakes and encourages operational efficiency in some aspects.

What Is a Zero Balance Account (ZBA)?

A zero balance account (ZBA) is a checking account that always has a balance of $0. Zero balance accounts are always connected to a main account, which is also known as a concentration account. This streamlines processing and transfers funds as needed into the ZBA.

ZBA.s are relatively common. They are used by corporations to guarantee that funds are accessible across several departments. They also help to get rid of excess balances in multiple accounts and retain tighter control over the distribution of cash. These accounts deal with issues like payroll, petty cash, and other similarly-natured issues.

How a Zero Balance Accounts (ZBAs) Work

The master account offers a consolidated location for managing an organization’s finances. When funds are needed to cover a charge or transaction, money is sent from the master account to cover the exact cost.  An employee doesn’t need to perform this manually because the procedure is entirely automated.

The precise amount is transferred from the primary account to the ZBA account each time a payment is posted to a ZBA. The money is transferred back to the primary account if the ZBA ends the day with a positive balance.

In other words, the main or primary account always has money in it. It only gives money to the ZBA when it really needs to. When it does send money, it always does it for the precise amount needed and never for more.

Advantages of a Zero Balance Account

There are a number of advantages that a zero balance account brings to a business. Let’s take a look at some of the main ones. 

Self-Managed

ZBA transactions are self-managed, which frequently saves the account holder time from having to manually fund or rebalance transactions. 

Fewer Errors

Many businesses report that there are fewer clerical errors or transaction failures as a result of human error because ZBAs are so heavily automated. Fees for overdrafts are avoided. 

Reduced Chance of Fraud

A corporation can lessen the likelihood that its bank account will be compromised by unauthorized or fraudulent transactions if it maintains one main account rather than several accounts with bank balances.

More Time Saved

One of the main advantages of ZBAs is that they remove the need to manually shift and manage funds to sub accounts due to their capacity to automate transactions. A business can avoid wasting time and money on balance tracking and fund repositioning by doing this instead.

Reconciliation 

ZBAs might also make it simpler to reconcile, audit, or get department-level spending reports.

Better spending control

ZBAs are excellent control tools for keeping an eye on spending. Debit card purchases normally need to be approved before they can be made. Because ZBAs have a balance of zero, this offers a company more control over spending and enables it to set up policies for how it will handle purchases.

Higher Interest Rates

Since zero balance accounts are not intended to be used as checking accounts, the master account will frequently earn a higher interest rate than the sub account. This makes it advantageous to keep money in this centralized location.

Disadvantages of a Zero Balance Account

ZBAs do have some drawbacks. Even when transfers and sweeping are automatic, the company still needs to check for faulty transactions and reconcile bank statements, and possibly more frequently. 

Money placed into that account may automatically be swept back if a transaction fails to finalize or is canceled. This can often lead to an increased amount of transactions, which could have financial impacts if the bank charges you by number of transactions.  

Finally, although being designed to reduce administrative difficulties, ZBAs increase the number of bank accounts a company has and could lead to increased administrative requirements.

Requirements for a Zero Balance Account

Unfortunately, not everybody or every business is eligible for a ZBA. Frequently, banks will only provide this service to businesses and not to the general public. Additionally, banks are not permitted to offer ZBAs to small, start-up firms.

ZBAs are required to have a linked master account, and the bank providing the ZBA will probably demand that the master account be housed at their institution. Prior to creating the account, the bank may request documentation of transaction history, historical average bank balances, projected spending amounts, and pertinent credit history data.

Examples of a Zero Balance Account

Let’s say you own Company X. The company has multiple zero balance accounts for each of the departments like marketing, HR, IT, and operations. Every time a department has to pay a vendor or make a purchase, they won’t need to add money to those accounts; instead, the precise amount will be sent automatically from the main account to the relevant ZBA to cover the day’s transactions.

Let’s take Company Y as another example. 

The main account of Company Y has $4,000 in it. Its 3 zero balance accounts have an amount of $0 at the start of the business day. Each sub-account receives many payments and checks throughout the course of the day, resulting in the accumulation of cash balances of $20, $50, and $100 in each account, accordingly. 

The zero bank account transfers all of this information from the sub-accounts to the master account at the end of the day. The master account now has a balance of $4,170 at the start of the following day, and the sub-accounts are once more at $0. 

This continues to happen every working day.

Summary

Zero balance accounts are a hugely useful money management tool for a number of businesses across each sector. A company checking account with a zero balance sweeps money in and out of the main account. Although the objective is normally to maintain a balance of $0, a corporation may decide to set a specific target amount for a ZBA so it always has some leftover cash on hand.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.