What Are Good Funds in Banking?

Table of Contents

1. What Are Good Funds?
2. Good Funds vs. Account Balance
3. Good Funds vs. Accounts Receivable (AR)
4. Why Good Funds Matter in Business

Key Takeaways

• Good funds are liquid, guaranteed funds available for immediate use, unlike checks or pending transactions that require clearance.
• They differ from account balance, which includes pending transactions, and accounts receivable (AR), which represents unpaid invoices.
• Businesses rely on good funds for immediate budgeting, planning future expenses, and maintaining healthy cash flow.
• To optimize good funds, automate AR processes, encourage digital payments, and regularly monitor account balances.

What Are Good Funds?

Good funds are guaranteed, available funds that can be used immediately, similar to cash. These funds differ from pending transactions or checks awaiting clearance. They can be used to withdraw cash, make purchases, pay bills, or transfer money instantly.

Banks hold checks to ensure the funds are valid and the check doesn’t bounce. This delay minimizes financial risk for the bank and those receiving the funds.

For example, while a paper check deposit might increase your account balance, it won’t count as good funds until the check clears. Understanding this distinction is crucial for maintaining accurate financial management and planning.

Good Funds vs. Account Balance

The account balance often includes pending transactions, such as wire transfers or ACH payments, which usually take 3-5 days to process and appear as good funds. In contrast, good funds represent only the available balance that is cleared and ready for use.

Example:

• Account Balance: $10,000 (includes pending ACH transfer of $2,000)
• Good Funds: $8,000 (available for immediate transactions)

Banks often delay full access to deposited checks to ensure they clear without issues, highlighting the importance of distinguishing between account balance and good funds.

Good Funds vs. Accounts Receivable (AR)

Accounts receivable (AR) refers to payments owed to a business for delivered goods or services but not yet received. Good funds are only recognized when these payments clear and become available.

Example:

A supplier invoices $5,000 for a product. This amount remains in AR until the customer pays and the funds clear. Once cleared, the $5,000 is categorized as good funds, usable for immediate expenses. Understanding where your company stands in reference to good funds versus funds that are waiting to be cleared is an essential part of accounts receivable management.

Why Good Funds Matter in Business

Understanding the difference between good funds, account balance, and AR allows businesses to plan accurately and maintain healthy cash flow.

Key Benefits:

1. Budgeting for immediate needs

   Knowing your good funds ensures you can cover urgent expenses like payroll and utilities.

2. Planning future expenses

   Tracking account balances and AR provides insights into incoming funds, aiding in long-term financial planning.

3. Optimizing accounts receivable management

   A strong AR team can reduce DSO, accelerate collections, and improve cash flow, helping to transform AR into good funds quickly.

Are you looking to manage your good funds better? Automating your AR process to reduce DSO, encouraging digital payments, and regularly reviewing account balances to identify discrepancies will give you better visibility and usage of your good funds. Learn more about the future of finance in our latest ebook.