Investing surplus cash in a current account or a demand deposit account

This page was last modified on 30-01-2013

Managing a cash surplus, even a temporary one, is not always easy. Given that the golden rule is to 'make your money work for you', the best balance between prudent management and good returns must be found.

The principles of sound management should encourage the business to keep the necessary funds at its disposal to meet its short or medium-term financial commitments. Depending on the circumstances, a safety margin of between one and 3 months is usually sufficient (see budget and cash flow plan).

However, while retaining liquidity is essential, a structural cash surplus can be a sign of management deficiency or the end of activity (termination of business/voluntary liquidation).

Banks offer an extensive range of remunerated solutions where returns depend on the duration of the investment considered and therefore on how quickly the funds can be recovered if required.

A current account, also called a demand deposit account, is a bank account which is used to manage bank money payments. It is held with a credit institution and debited or credited with payments made. The current account is the central point for managing all of the business' financial flows in respect of all of its business relationships with clients, suppliers or other third parties.

The objective of a current account is to centralise:

  • cash deposits and withdrawals;
  • collections and payments using a means of payment other than cash (cheque, payment card, transfer, direct debit/standing order, etc.);
  • movements of funds with other accounts and bank products (savings account, savings plan, loan account, securities account, etc.).

Objective: current accounts are used to manage cash and pay invoices or contracts irrespective of the underlying commercial counterparty.

 

Who is concerned

Available to the self-employed and any type of business, a current account is the basic account required for each activity. A current account is opened when a business is set up or when a commercial, industrial or other activity is launched.

A current account can be used in all phases of a business’ life cycle:

  • creation (deposit of capital, notary fees);
  • day-to-day management of the business (payment of expenses and materials, receipt of payments);
  • growth of the business (purchase of new machinery);
  • liquidation of the business (liquidation costs).

Prerequisites

A current account is normally opened in a bank chosen by the entrepreneur. Businesses must present their articles of association (or the draft version thereof if they have not yet been filed with the Trade and Companies Register - Registre de Commerce et des Sociétés) and any other documents required by the bank to prove their source of income and their business activity (balance sheets, list of shareholders, etc.). The bank will also require the list of authorised signatures and the identity documents of the persons with a power of attorney with respect to the account in question.

How to proceed

Description of current accounts

Application terms and conditions

Expenses
  • account opening fees;
  • account management fees;
  • account statement fees;
  • fees for closing the account.
Interest

Debit and credit interest rates depend on the conditions provided by banks.

Holder and proxy: the holder of the current account is called the account holder. The holder can also give power of attorney to third parties who are then called proxies (they are authorised to carry out certain transactions, sometimes within certain limits).

Set-up times

The time required to open a current account depends on various factors, including, for example, the banking relationship between the group and the relevant bank, the legal status of the business or company, the applicable law of the company (Luxembourg or foreign law), etc.

Advantages and disadvantages

Advantages

  • risk-free investment;
  • permanent availability of the money;
  • simplification of cash management;
  • possibility of setting up direct debits and standing orders;
  • accessible by different means of payment (transfers, card withdrawals, cheques, etc.).

Disadvantages

  • in principle, lower interest than on investment accounts (savings account and term deposit);
  • loss of value dates.