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Cash Sweep

The compulsory use of excess cash flows to settle outstanding debts

What is a Cash Sweep?

A Cash Sweep is the use of excess cash flows to maximize interest earnings or to pay off outstanding debts, instead of distributing it to shareholders. Firms use borrowed money for expansion or to finance cash shortages, in which case new liabilities arise. Some debts are healthy (growth) while others could sink the business into a financial crisis. Therefore, clearance of debts is paramount for any borrower, to ensure the steady and stable health of their business. Cash sweeps aid in accelerating the payoff of outstanding debts. Depending on the lender’s terms and covenants, debt sweeps may be compulsory.


Cash Sweep


A cash sweep is an ideal cash management tool to help large firms with accounts that involve great variability in receiving funds. The cash management arrangement can also work in reverse. That is, if the funds in the sweep account fall beyond a certain point, a drawdown in the credit account is conducted to attain the target balance. Cash sweeps can also refer to investments, where an account can automatically transfer money into the current highest interest-earning account at the end of each day. This ensures that the sweep account earns the optimum amount of money possible.

The easiest way to understand a cash sweep and sweep accounts is to think of a cash sweep as any deliberately chosen and automated transfer (“sweeping”) of a portion of a company’s cash flow to be used for a specific purpose – such as paying off debt or making an investment. The company makes arrangements with its bank to regularly (usually at the end of each business day) and automatically transfer excess cash flow funds from whatever account(s) they may be in to the sweep account. Then money is again automatically transferred from the sweep account to whatever project it is designated for. For example, if the company wants to do cash sweeps to pay off a loan from the bank, then the money transferred (swept) into the sweep account will automatically be used to make a loan payment of the amount equal to the total amount of money that has been transferred into the sweep account.


Advantages of a Cash Sweep

The use of a cash sweep eliminates the aspect of personal intervention. It saves the account owner the time and trouble of having to make separate decisions every day about where to direct the company’s cash flow. It also helps them stay on track toward achieving their designated financial goals since the process is automated and ongoing.

In the case of a cash sweep for optimizing investments, it ensures that the account owner earns the optimum amount of interest by making sure that cash is always in the account earning the highest interest rate. Cash sweeps were originally used to get around government regulations prohibiting commercial checking accounts from earning interest. In order to earn interest on their excess cash, companies set up cash sweeps to move excess cash from their commercial checking account that could not pay interest into another account – such as a money market account – where the money could earn interest.

2016 saw the emergence of brokerage accounts with similar features that allow accounts to earn interest on money lying unused in a brokerage account.


Expansion of Cash Sweep Views

Cash sweep is a process that is readily available to both individuals and businesses. It is a mechanism to ensure that money does not sit idly in accounts without earning any revenue or serving some other purpose (such as debt repayment). Interest earning is also optimized to ensure the investor realizes value for their money. Cash sweep arrangements are designed to secure the best deals and liquidity in investments such as mutual funds, money markets, savings accounts, and other high-interest investments.

A debt cash sweep, on the other hand, offers a platform that hastens the process of paying off debt. Without a debt sweep plan in place, it’s easy to be tempted into diverting excess money to other projects, which can further financially burden the business. A debt cash sweep ensures that debt is paid off as rapidly as possible, thereby keeping an individual or business in a sound, healthy financial position.


Cash Sweeps for Individuals

Cash sweeps for individuals suit investors who like to automate their investments. A cash sweep account is typically used in brokerages for parking funds ready to be reinvested. Such funds include dividends, cash deposits, etc. Many individuals leave this money untouched in accounts awaiting appropriate long-term investment opportunities. In the meantime, the money can accumulate interest in these cash sweep accounts.


Cash Sweeps for Businesses

Cash sweeps are ideal for businesses because their automated nature helps businesses avoid having to make continual decisions and manual money transfers. They are business tools that assist small and medium-sized firms in maximizing revenue earned on idle money reserves in accounts. They diversify the sources of income that would otherwise be underutilized. The business simply sets up a minimum balance for their primary checking account. Any amount over that minimum is automatically swept into high interest earning accounts – or in the case of debt sweeps, automatically dedicated to loan repayment.

Businesses also use cash sweeps to manage their spending. In case the funds in their primary checking account fall below the minimum amount, the funds are swept back from the investment account to ensure that they have adequate operating capital. Some banking institutions encourage sweeping by offering attractive interest rates on sweep accounts.


A Cash Sweep in Financial Modeling

A financial analyst will often build a cash sweep in financial modeling.  For example, when building an LBO model, it may be necessary for the analyst to use Excel functions and formulas that automatically take all available cash and use it to repay debt.

Below is an example of a financial model from CFI’s online valuation modeling courses.


A cash sweep in financial modeling


Other Resources

You can increase your expertise in cash flow analysis and money management by using the following CFI resources to learn more:

  • Free Cash Flow
  • Three Financial Statements
  • Cost of Debt
  • Financial modeling guide

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