Sophisticated corporate treasurers learned long ago that a dollar that sits overnight in a checking account or in an unopened envelope is a dollar that is not earning money.
Although the average wage earner normally has little choice but to let languish in his or her checking account the $100 that won't be needed until the end-of-the-month rent check is due, corporations with hundreds of thousands or millions of dollars of unused cash at the end of each day can loan those funds overnight to banks or companies that find themselves temporarily short of funds.
If a corporation lends $1 million overnight at the equivalent of 7 percent annual interest, the company can earn more than $191. Over a year, that works out to $70,000 in interest income that would be foregone had the company left the funds in its checking accounts (which by law pay no interest).
The various corporate strategies of investing excess money temporarily, of speeding up collection and deposit of accounts receivable, or of waiting to pay bills until they are due (rather than a day or 2 or 10 early) are called cash management.
At long last, the federal government has plunged into the cash management game, after President Carter last November directed his reorganization staff (the same group that is trying to reform civil service and cook up a Department of Education) to find out how "modern cash management techniques" could help the government.
With a budget of more than $450 billion this year the government is not only the nation's largest borrower, it is also the nation's largest bill payer, bill collector and bank depositor.
Officials at the Treasury and the Office of Management and Budget claim that, as a result of new cash management techniques they have put into effect in recent months, the government will save $125 million a year in 1978 and 1979.
Some of those "savings" actually will be increased income to the government, while some will come from more efficient bill collecting which should reduce the need for the government to borrow.
Compared with federal spending, projected to be a half trillion dollars next year, or even the $47 billion the government expects to spend on interest on the federal debt in fiscal 1979 (which starts Oct. 1), $125 million is a pittance. But, as Carter and the House and Senate budget committees have discovered, reductions in the level of federal spending (a key element in any attempt to balance the budget and reduce the role of government in the life of all citizens) must come in small amounts, for the most part, rather than in dramatic chunks.
And Wayne Grunquist, associate director of OMB for management and regulatory policy, said the $125 million in savings is not the end of cash management innovations. Granquist said 65 other efforts are under way at various levels of the government to improve cash management. How much more can be saved is hard to determine, he said at a small briefing with reporters last week.
Much of that $125 million officials think they will save this year and next will be interest the government earns on so-called tax and loan accounts at banks where funds used to lie idle (in much the same way a corporation invests its spare cash overnight). The rest comes from a series of less dramatic moves such as directing some corporations to pay their bills by computer transfer of funds from their bank to the Treasury's rather than by putting a check in the mail.
"Whether it's taxes or receipts from oil leases, the idea is don't let a check get caught in the mail, caught waiting to be opened, or lying around waiting to be deposited," said Dick Cavanagh, executive director of the federal cash management project at OMB.
"Each $1 billion of receipts you accelerate by one day saves $167,123 in interest" (at the 6.1 percent interest rate average on all Treasury debt), Granquist said.
None of the ideas that have been put into effect are new ones. Corporations have been using them for years. Since the Nixon administration, the Treasury has been trying to get Congress to pass a bill permitting the Treasury to require banks to pay interest on government deposits. Under the old, long-standing system, in return for performing services such as handling government tax and loan deposits or selling savings bonds, the banks got the use of the idle Treasury balances to lend out.
But starting july 1, under a bill passed recently at Carter's urging, the Treasury will pay the banks for the services they render, while the government will collect interest on its deposits.
The government stands to collect $75 million more in interest than it will pay banks, according to Paul Taylor, deputy fiscal assistant secretary of the Treasury. The government will collect interest at one-quarter percent below the federal funds rate, which has been hovering near 7 1/4 percent recently. The federal funds rate is the interest banks charge each other for overnight loans of excess reserves.
The government also has acted to speed its receipts and improve its bill-paying scheduling. By putting such large programs as foreign military sales and uranium enrichment services from the Department of Energy on computer transfer of funds rather check transfer, OMB estimates a savings of $3.5 million. That is because the money is immediately available to the government rather than being cleared through the Federal Reserve.
Already $7 billion is being transferred by computer, and the Treasury says it could use so-called electronic funds transfer for another $36 billion, generating a further savings of $14.5 million.
Last January, the government also put a stop to a corporate technique of paying the government in one Federal Reserve District with a check drawn on a bank on the other side of the country.
For example, a company may have been paying the withholding taxes it owes directly to the Federal Reserve bank in New York (which serves as the government's bank). The company might have paid, however, with a check drawn on a company account in a bank in Alask or Hawaii. That check could take six to eight days to clear, Cavanagh said.
Now the Treasury requires a company to pay its bills from an account within the same Federal Reserve district as the Fed bank to which it makes the deposit. That means same-day collection and a savings to the government of $9 million a year in interest.
The government also has changed the way it transfers money to grantees such as universities or, more importantly, public works projects. Instead of sending lump-sum advances to the public works projects funded by the Commerce Department, the government now sends "letters of credit" that permit the projects to draw funds as they need them. That change in the $6 billion program has saved the Treasury $41 million in the last 12 months, Cavanagh said.
Cavanagh said the reorganization project is working hard on getting the government to pay its bill on time, rather than early or late. He pointed to a General Accounting Office study of the first six months of 1978. GAO estimated that, because the government paid bills early, it paid an extra $118 million in interest on the funds it had to borrow to cover the early checks. By contrast, businesses had only $30 million in extra interest costs because they were paid late by the government.
Granquist noted that only three of the 57 government disbursing centers have "tickler" files to tell them when a bill should be paid. Now most of those centers pay the bills as they come in. "It's the big companies that get paid early, too," Granquist noted. "They're the ones on your doorstep with their hands out as soon as the bill comes in, while the small guys are usually the ones who get paid late."