Cleared funds

Cleared funds are the amount of money in your account that is possible to withdraw or invest. It means funds transferred by electronic transfer or bank check. Cleared funds take into account delays in settlements arising from transfers of funds from an account to account. This term appears when the company needs to know its financial situation, especially in the case of short-term cash forecasts.

Only cleared funds are available for payments because receipts or payments that have not yet been cleared do not affect the available account balance.

Types of funds

Several conditions of funds can be described:

• Cleared funds - as defined above,
• pending funds (otherwise unavailable funds), existing in the account, for example, brokerage or check are defined as pending,
• available funds are the amount of money that is on your bank account and is available for immediate use.

Moving money] between banks or selling securities can take some time. Sometimes even few days pass before the bank gets confirmation that the money was transferred. Until then the account is credited with the sum, it is pending and not cleared. Therefore, such money cannot be used in transactions.

Until the cleared funds are recognized as settled, they remain pending, thus investors or clients cannot use them. Distinguish between cleared funds and available funds. By law, banks are required to provide the depositor with a certain portion of deposits within a few days of submission.

Forecasting

Forecasting may show that there are insufficient funds and the account will have a negative balance in the cleared funds, it will be possible to take measures in advance to resolve the problem, without the risk that the bank may refuse payment that the check payment will be defamed. Funds that can be taken in advance include negotiating a sufficient temporary overdraft with the bank, or possibly postponing planned payments for a day or less until the expected proceeds are settled.

Once you have deposited funds on your account, it may take a few days for the bank to be able to make the entire amount available for withdrawal or use. Cleared funds is a situation when funds are transferred from the bank of the check issuer to the bank that is to receive the deposit.

The purpose of the cleared funds forecasts is to assess whether the company will have a sufficient amount of cleared funds on its account to meet payment obligations, allowing any overdraft facility that the company may have. Forecasts for cleared funds should be regularly reviewed and updated, on a daily basis for companies with large and uncertain cash flows.

Examples of Cleared funds

• Cash: This is the most common example of cleared funds. Cash is a reliable form of payment because it is immediately available and requires no further action.
• Electronic Funds Transfer: This type of payment is becoming increasingly common. It involves transferring money electronically from one account to another, usually via a bank. This is an efficient form of payment and is generally considered to be cleared funds.
• Bank Checks: Bank checks are a reliable form of payment that can be used to transfer money from one account to another. Bank checks are considered to be cleared funds and are often used for large transactions.
• Wire Transfers: This type of payment involves sending money from one account to another via a wire transfer. This is a secure form of payment and is generally considered to be cleared funds.

Advantages of Cleared funds

Cleared funds have several advantages:

• They provide the certainty of the availability of funds. Cleared funds are immediately available to use, and there is no risk of a delay in the transfer process.
• They are secure. Banks and other financial institutions use strict security protocols to ensure the safety of funds and protect them from theft or fraud.
• They are reliable. Cleared funds are not subject to market fluctuations or other external factors, so they are a reliable source of funds.
• They are efficient. Cleared funds are transferred quickly and efficiently, which means they can be used immediately.
• They are cost-effective. Electronic transfers and other methods of transferring cleared funds are generally less expensive than checks or other traditional methods.

Limitations of Cleared funds

Cleared funds have several limitations that should be taken into account when making financial decisions. These include:

• Limited availability of funds: Cleared funds are those that are currently available in the account and are not subject to any pending transactions. This means that the amount of available funds may be limited and could be insufficient for making large investments or purchases.
• Potential delays in transaction times: Since cleared funds are subject to the processes of transfers between accounts, there could be delays in transactions times. This could lead to missed opportunities or late payments.
• Processing fees: Cleared funds usually involve transaction fees that can add up over time. This could reduce the overall return on investments or add to the cost of purchases.
• Potential security risks: Transferring cleared funds involves the exchange of sensitive financial information, which could make them vulnerable to hacking or other cyber-attacks.

Other approaches related to Cleared funds

Cleared funds is an important concept when assessing the financial situation of a company, especially in the case of short-term cash forecasts. Other approaches related to this concept include:

• Electronic transfer: This is the electronic transfer of funds from one account to another. This method is generally efficient and secure, as it allows for instant transfers and ensures that the funds are available for immediate use.
• Bank check: This is the transfer of funds from one bank account to another via a check. It is a slower process than electronic transfer, as it can take several days for the funds to be transferred, depending on the banks involved.
• Settlements: Settlements occur when funds are transferred from one account to another. This process can take several days and may involve additional fees.

In summary, cleared funds is an important concept when assessing a company's financial situation, and other approaches related to this concept include electronic transfers, bank checks, and settlements.

Footnotes

Cleared funds — recommended articles

Tri party agreement — Void Transaction — Advance funding — Memorandum account — Credit sweep — Variation Margin — Borrowing capacity — Credit Facility — Bank reference

References

• BPP Learning Media, (2012), FIA Foundations in Financial Management - FFM study Text-2013, BPP Learning Media, United Kingdom.
• BPP Learning Media 1, (2015), CIMA - F1 Financial Reporting and Taxation, BPP Learning Media, United Kingdom.
• BPP Learning Media 2, (2015), FIA Foundations in Financial Management FFM, BPP Learning Media, United Kingdom.
• Dawes G., (2003), Laws of Guernsey, Hart Publishing, USA.
• Eichberger, J., & Summer, M. (2005). Bank capital, liquidity, and systemic risk. Journal of the European Economic Association, 3(2-3), 547-555.

Author: Dominika Pszonak