Q&A: How to Calculate Earnings Allowance?

When I thought to write Q&A posts I assumed I'd run out of questions to answer but, from outside the field, very few Bankers or Treasurers understand Account Analysis so it has given me more to write about and - hopefully - this space remains informative.

What is required to calculate the Earnings Allowance?

Calculating your Earnings Allowance (EA) requires:

1. A Collected Balance (CB)
2. The Earnings Credit Rate (ECR)
3. The Reserve Requirement (RR)
4. Days in the Period (DP)
5. Days in the Year (DY)

Where, EA = CB * (1-RR) * ECR * (DP/DY)

In some instances where the month itself is unknown so you cannot accurately calculate whether there are 30 days versus 31 days in the period, some calculations use the following:

EA = CB * (1-RR) * ECR/12

Can you calculate EA without a Collected Balance?

Sure, you can but I wouldn't call it an Earnings Allowance.  If the Earnings Allowance relies on a Collected Balance to determine how much that balance has "earned" to offset qualifying bank service fees, then how can you calculate EA without it?  The answer received...

There is no standard!

Umm.  Yes, that is theoretically correct; there is no standard because no one felt they needed to standardize such a thing.   

When there is difficulty figuring out how your bank is calculating the Earning Allowance (or anything for that matter), the best thing to do is to ask the bank to provide you their calculation formula.  Not including a Collected Balance in an Earnings Allowance calculation formula might appear to be a typo at first until you get a response such as, "there is no standard!"  At that point, you may assume the attitude is, "we can do whatever we want and make up calculations because no one has told us we can't."  

Ask questions and ask them often even requiring an explanation for things that just do not compute.  

Happy Analyzing!