Balance Required (8/14)

Account Analysis consists of balances and fees which comprise a basic math calculation. There are 14 balances that I refer to as "Remember the Math". I will discuss all 14 in 14 different posts.

Balance Required

Sometimes referred to as Collected Balance Required or Balance Equivalent - Total Service Charges, this is the amount required to offset total analyzed service charges for a current period.

This differs from the Balance Required Multiplier which is the amount required to offset $1 of analyzed service charges.

In perfecting my calculations, I was confused as to which definition correctly fits which title.  If you Google, "Collected Balance Required", you may find the definition given isn't truly correct. But let's breakdown the math...

Calculating the Balance Required

Lets assume the following numbers are true:

Analyzed Service Charges (ASC) = $500.00
Earnings Credit Rate (ECR) = 0.2%
Days in Period (DP) = 31
Days in Year (DY) = 365
Reserve Requirement (RR)** = $0

Collected Balances (CB) = (ASC) / [(ECR * DP/DY) * (1 - RR)]

CB = 500 / [(0.002 * 31/365) * (1 - 0)] = $2,943,548.38

To offset the total analyzed charges of $500.00 for the current period, the collected balance required is $2,943,548.38.

That's a sizable balance required just to offset $500 in analyzed service fees!  But imagine (and calculate) how much less that Balance Required would be if, and I'm just dreaming here, the ECR was 2%.

Balance Required to Offset $1

There are 2 ways to calculate this balance:

1. Collected Balance Required / Analyzed Service Charges
2. (1/ECR) / (DP/DY)

Using the 1st option, $2,943,548.38 / $500 = $5,887.09.  This is the simplest way to calculate the Balance Required Multiplier.

However, if you do not already have the Collected Balances Required amount, you will use the 2nd option.

=(1/0.002) / (31/365) = $5,887.09

The "multiplier" part comes in when you multiply this number by Service Charges to get the Collected Balances Required:

$5,887.0968 * $500 = $2,943,548

I added the next two decimal places which would have otherwise skewed the total by $3.  In this example, the balance required to offset $1 in service charges (if the above assumptions still hold true) is $5,887.09.

Auditing your Balance Required and/or Balance Required Multiplier

If you can read the raw data of the EDI 822 file, these balances should be sent by your bank(s). In an ideal world, what is sent on the EDI 822 file would also be sent on the paper statement.

For example, one of the large financial institutions has a dummy Account Analysis statement online which includes the "Service Charge Multiplier".  Using this number, the account holder can multiply it by the total service charges to find their Collected Balances Required.

The best way to audit these balances is still via an Account Analysis system.  It allows one to budget and forecast related service charges to plan future account collected balances required esp. with the current very unappealing ECR offerings.

Remember The Math

In the math thus far, Balance Required is the 8th component on the Compensation side of the Account Analysis equation.  Only 6 more to go! Til then...

Happy Analyzing!


**Most banks no longer deduct 10% as a Reserve Requirement so I've plugged in $0.00