Definition - What does Cash Sweep mean?
Cash sweep is the use of a company's excess cash to pay outstanding debts ahead of the scheduled payment date instead of giving it to their investors or shareholders. This process helps a company to minimize risk and liability as well as pay its debt at a faster rate than what is expected or agreed upon.
Divestopedia explains Cash Sweep
A cash sweep is an automatic bank process where funds are transferred from an investment account to a deposit account or vice versa with the purpose of minimizing the risk of incurring more or higher interest rates from their debt. It can be done within the same banking institution or from one bank account to another bank account from another institution. Funds that are added in the sweep account are transferred according to the specifications of the customer and most cash sweeps occur once a day.
The amount of cash available for a cash sweep is calculated as follows:
Cash Sweep = Total Cash at Hand – Minimum Cash Balance for Operations + Debt Service Cash Flow
This can be furthered explained in this sample balance sheet from Company ABC:
|Beginning cash balance (Total cash at hand)||$326.8|
|(-) Minimum cash balance for operations||$103.2|
|(+) Cash flow available for debt service||$68.2|
|Cash available for sweep||$291.8|
Cash Sweep = $326,800,000 - $103,200,000 + $68,200,000 = $291,800,000