Chapter 11 Cash Disbursement Systems

1. Chapter 11Cash Disbursement Systems • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

2. Cash Flow Timeline Disbursement Float Mail Processing Clearance Float Float Float Availability Clearing Slippage Float Drawee bank account debited Payee receives collected funds Payee deposits check Payee or lockbox receives check Drawee writes and mails check

3. Disbursement Policies Disbursement Policy: The manner in which firm’s financial obligations are settled. • Maximize value through payment timing • Ethics • Minimize idle balances in disbursement accounts • Optimize the accuracy and timeliness of information • Prevent fraud

4. Centralized vs. Decentralized Disbursement • Centralized Disbursement - Allows the staff at the corporate headquarters to oversee and initiate each disbursement. • Treasury department can easily determine the overall cash position • Provides more accurate short term cash flow forecasts. • Elimination of duplicate disbursement accounts reduces cost • Higher disbursement float • Decentralized Disbursement– involves payments made by divisional offices or individual stores. • Faster than the centralized disbursement • Improved relationship with the customers • Hamper the efficiency of and control over disbursement accounts. • Narrowed investment opportunity • Hybrid Approach- Combination of centralized and decentralized disbursing where checks are issued at field operations, but being written on Central disbursing account

5. Disbursement Systems • Based on firm’s cash flow and banking relationship • Simple Disbursement Systems • Complex Disbursement Systems • For relatively predictable cash flows • For stronger bank relationships

6. Simple Disbursement Systems • Simple disbursement system use basic methods to fund disbursements, including cash from daily operations, maturing investments, paper based instrument • paper-based payment instruments • Check or Drafts • Account reconciliation service- Bank is provided a record of checks drawn • Paid only reconciliation • Range reconciliation • Full reconciliation • Positive Pay • Reverse Positive Pay

7. Complex Disbursement Systems • Uses both • Paper-based systems • Electronic disbursing systems • Multiple-drawee checks • Purchase order with payment voucher attached • Controlled Disbursement account • Zero Balance Account (ZBA)

8. Optimizing the Disbursement System • NPV = PV of Net cash flow - Initial investment • PV of Net cash flow = (# of payments × Savings per payment)/ Cost of Capital

9. A PV Model for Optimal Disbursing Mechanism • Present value of check payment APVc = ------------------ + VCc [1 + i(nc + cc)] • Present value of electronic payment APVe = ------------------ + VCe [1 + i(ne + ce)]

10. Summary • Objective of a disbursement system: pay with the right method, at the right time, in an efficient manner. • Disbursement systems are simple and complex. • Simple systems tend to be paper based and use basic funding mechanisms. • Complex or sophisticated systems are prone to use electronic payments, controlled disbursement accounts and ZBAs with electronic funding of the accounts. • Disbursement systems should be well coordinated with cash collection and cash concentration systems.