disbursement cash(1)
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Disbursement pptTRANSCRIPT
Disbursement System
Disbursement System include the banks and the delivery mechanism and procedures firms use to transfer of cash from the firm’s centralized cash pool to disbursement banks and then on to supplier and other payees.
Disbursement system are simpler because headquarters control it more directly.
Objective
By slowing down cash disbursement as much as possible and accelerating cash collection, the desired objective of cash disbursement is to increase the availability of cash or retain the cash as long as possible.
Disbursement Policy: 4 Principles Maximize value through payment timing Optimize the accuracy and timeliness of
information Minimize balances in disbursement accounts Prevent fraud
Maximize value through payment timing Payment should be timed to add the
maximum value to the company- First for a cash poor company, it should pay
on terms but not before- A company should take cash discount when it
is available- Within ethical, legal, and practical constraints
a company should take advantage of float offered by strategic location of disbursement bank.
Optimize the accuracy and timeliness of information Accuracy and timeliness of information are
key attributes of disbursement system. Providing accurate information in a timely
manner without incurring excessive cost Accurate fund balance information received
early in the days add value through access to investment with higher interest
Types of Disbursement Decisions Strategic Decisions – Decisions that have
long term effect and cannot be changed immediately.
Tactical Decisions- Day to day operating decisions.
Disbursement Decisions
Centralized VS Decentralized disbursing Disbursement control lies between
completely centralized and completely decentralized decision making.
Strategic decisions made on a centralized basis whereas tactical decisions may be made in the field.
Rarely all decisions are made both at the Headquarter and in the field.
Primarily Decentralized System Field managers make major tactical
decisions. Payment authorization, preparation and
release are performed at the field level Checks are drawn on a local Bank.
Primarily decentralized Systems Advantages- More autonomy to field managers- Relationship with the payee enhanced. Disadvantages- Larger balances need to be kept- Disbursement float is lower- Risk of unauthorized disbursement
Primarily Centralized System
Headquarter selects drawee bank and authorizes payment, prepares and releases payment.
Advantages- Excess balances are eliminated and can be
employed in profitable venture.- Disbursement practices are implemented at the
best interest of the company.- Unauthorized disbursement is reduced
Primarily Centralized System
Disadvantages- Autonomy of the field manager is reduced- Relationship with the payee is strained- Extra processing time may result in missed
discounts.
Cash Disbursements and the Cash Flow Timeline Payment system Ethics and organizational policies Decentralized v.s. centralized disbursements Organizational structure Banking system Treasury information system Cash flow characteristics
Payment system
Payment mechanism available to the company, their current state of development and relative cost, the existing clearing and settlement mechanism, the regulatory framework are important parts of the payment system.
Ethics and organization policy Writing checks in anticipation of adequate
balances by the clearing time Sending checks to the company’s office
instead of lockbox designated by the vendor
Decentralization Vs Centralization disbursement Centralized disbursement allows the corporate HQ
to look after each disbursement and possibly also initiate each disbursement.
Cash manager at Company HQ has a better view of the company cash position and allow him to take better decision related to availing a cash discount and amount of transfer to the disbursement account.
Disbursement float is higher. Elimination of duplicate disbursement account
reduces cost. Young small company operating at single location
are centralized and deals with only one bank.
Decentralized disbursement
Decentralized disbursement allows payments to be made by offices or individual stores.
Companies with operation spread throughout multiple locations tend to be decentralized
Improved relationship with the supplier. Severely hamper the efficiency and control of
disbursement accounts.
Organizational Structure
Functional areas within the organization affect a company’s disbursement system.
By organizational structure we mean firm’s functional areas, their relationship, chains of command, decision making flows and formal and informal groups.
Treasury Information System
Capability of a company’s MIS is limiting factor on the disbursement system.
Companies are more highly automated in payables than in any other areas
Automated system ensures that bills are paid in time achieving substantial cost savings
Cash Flow characteristics
Cash management system create value because cash flows are unsynchronized or uncertain.
A company with predictable cash flow prefers a disbursement system in which surplus are transferred in interest bearing accounts.
Companies with unpredictable cash flows prefer banks that link disbursement to attractive credit facilities.
Value of disbursement float
Payor receives invoice
Payor mails check
Payee receives check
Payor deposits check
Payor’s account debited
DisbursementFloat
Payment float
Cash Flow Timeline
Mail Processing ClearingMail Processing ClearingFloatFloat Float Float Float Float
Availability SlippageAvailability Slippage FloatFloat
Payor puts check in the mailPayor puts check in the mail
Payee receives checkPayee receives check
Payee deposits check at bankPayee deposits check at bank
Payee receives good fundsPayee receives good funds
Bank debitsBank debits payor’s accntpayor’s accnt
Disbursement FloatDisbursement Float
Components of Disbursement float Disbursement float consists of –
Mail float – time between Payor's mailing of the check and the payee’s receipt of itProcessing float – the time required to deposit the check after it has been receivedPresentation/Clearing float – the time required by the banking system to return the check and present it against the Payor's banking account.
An example
XYZ Garments pays suppliers with paper checks. Invoices are net 30 and XYZ usually mails check an average of 30 days from the invoice date. Mail time from XYZ to suppliers averages 4 calendar days. Most checks are received by lockboxes and processed on average .5 day after receipt. Clearing time back to XYZ disbursement bank averages 1.5 days. An average of $ 36500000 is disbursed to suppliers every year. The opportunity cost is 10 % per annum.
The payment float associated with the disbursement system-
Payment initiation time = 30.0 days
Mail time = 4.0 days
Processing time = 0.5 days
Presentation time = 1.5 days
36.0 days
Value of payment float = $ 36500000/365 X .10 X 36 days = $ 360000 per year
An Example (Cont.)
If XYZ change its disbursement policies by increasing the payment initiation time to 34 days and its presentation float to 3.5 days
Then payment float associated with the disbursement system-
Payment initiation time = 34.0 days
Mail time = 4.0 days
Processing time = 0.5 days
Presentation time = 3.5 days
42.0 days
Value of payment float = $ 36500000/365 X .10 X 42 days
= $ 420000 per year
Can we say now that XYZ is $ 60000 better off ?
Mail Float issue
If the postmark date is used by the payee to determine whether an invoice has been paid on time then mail float is considered a part of the disbursement float.
If the receipt date is considered the valid payment date, lengthening the mail time will accompany a corresponding decrease in payment initiation time.
Missed discount
Discount are allowed to encourage early payment.
Disbursement system must consider the possible cost of missed discount if payment cannot be made in time.
PV concepts are useful in computing missed discounts.
Another example
XYZ Garments pays suppliers with paper checks. Invoices are 2/10, net 30 and XYZ usually mails check an average of 30 days from the invoice date. Mail time from XYZ to suppliers averages 4 calendar days. Most checks are received by lockboxes and processed on average .5 day after receipt. Clearing time back to XYZ disbursement bank averages 1.5 days. An average of $ 36500000 is disbursed to suppliers every year. The opportunity cost is 10 % per annum.
The payment float associated with the disbursement system-Payment initiation time = 30.0 daysMail time = 4.0 days
Processing time = 0.5 daysPresentation time = 1.5 days
36.0 days
Another example (Continuation)PV of payment float = $ 36500000 {1 + (36 X .10)/365}
= $ 36140000 with no discount
PV of payment float = $ 36500000 (1-.02) {1 + (16 X .10)/365}
= $ 35610000 with availing discount
The difference is $ 530000 per year. This means if XYZ misses all the discounts and pays on the net day, it loses that amount each year.
Excess Balances in the disbursement banks Available balance above the level necessary
to compensate disbursing banks for its services.
Transfers of funds may not be synchronized with the amount presented against the account.
Timing problem can also create excess balance.
Elimination of excess balance created by timing problem Controlled disbursing – Disbursement bank let the
firm know in advance the amount of check presented so that the firm can have enough time to transfer fund to cover the check presentment.
Zero balance account – Transfer cash at the end of the day from another account at the same bank.
The bank can arrange to sweep any balances left at the end of the day into an interest earning account.
Transaction costs
Costs of transferring value from the concentration account to the disbursing account and to the cost of transferring values to the payee.
Bank charges, third party vendor information charges, in house expenses associated with payment, cost of over-drafting the disbursing accounts.
Disbursement tools
Zero Balance Accounts- Designed to remove excess balance while retaining the
advantages of separate accounts- A zero balance account has a balance of zero at the start of the
day- Its balance at the end of the day will be zero again- Money is usually moved from a master account in the same
Bank- Through the zero balance account the firm can keep less
amount of money than the summation of buffer in each individual disbursement account.
Zero Balance Account
Funding to Zero Balance Account can also be made from another bank.
When the master account is in the same bank then debiting the firm’s account enable transfer of fund.
If the master account is in another Bank then fund is transferred through wire.
Pseudo-zero balance account- In this the firm is notified in advance of the amount
of checks presented against the disbursement account. So the cash management can transfer the fund.
Advantages of Zero Balance Account Excess balance is reduced. Presentation time is increased. Facilitates decentralization by proving local
check writing authority. Maintain funding control from the
headquarter.
Reconciliation serviceAssembling a list of checks presented against the disbursement account and comparing the list to the checks written.
Stop Payment ServicesIssued to the disbursement bank by the firm to recall a check issued earlier.
Sweep Account- Automatic investment service for disbursement account- After clearing the excess balance above some desired level is
automatically invested in overnight investments. - It reduce excess balance and lower administrative costs. Payable through drafts (PTD)- Appear as checks but are drawn on the issuing form instead of
disbursement bank.- The firm will have one day time to verify the authorized amount
and ensure that other conditions have been met.
Controlled Disbursing Account The account receives only one daily
presentment early in the morning. The bank processes the item and notifies the
Company by the mid or late morning. This allows the treasurer to invest the rest in
securities. It thus reduces idle balance. Why early morning is cut off point?
Key Issues in choosing a controlled disbursement bank Float – Used primarily for information. Availability of
clearing information early in the day. Checks presented in the later part of the day allow additional time.
Cost – Bank charges, internal costs of maintaining information system, charges of bank reconciliation and balance reporting.
Time of notification – When did the Bank last receive its last presentment. It is possible to use a second presentment if it is in the late morning.
Key Issues in choosing a controlled disbursement bank Funding alternative- When notified the
concentration Bank can wire transfer the fund to the disbursement bank. But it is expensive
Treasurers prefer to use ACH. ACH has one day delay.
Remote Disbursing
Variation of controlled disbursing Selection of disbursing bank will depend on how
much it extends clearing time of checks. Objective is not only reduce excess balance but
also to extend disbursement float. Extending the disbursement float may benefit the
firm in PV sense, delay in availability may have adverse consequences in future price negotiation.
Dual balances
Arises when the disbursement account is funded by DTCs that available on disbursement account in one days but does not clear the concentration account until a later time.
For the tie of overlap available balances exist in both banks at the same time.
Payee relationship
Relationship with the payee is primary concern in managing a disbursement system.
Effort by the Payor to intentionally delay payments may be considered unfavorable.
Measuring the costs of payee relationship is difficult.
Strained business dealings, higher prices, delivery holdup, damaged image, law suit, adverse credit ratings.