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. Learning Objectives • Identify the environmental variables influencing disbursement decisions. • Identify the major disbursement mechanisms, relevant institutional aspects, and major implementation variations. • Specify the major funding alternatives for disbursement accounts. • Conduct valuation of payment mechanism decisions. • State the contribution of and steps involved in disbursement location model applications.

3. Disbursement Policy: 4 Principles • Maximize value through payment timing • Optimize the accuracy and timeliness of information • Minimize balances in disbursement accounts • Prevent fraud

4. 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

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

6. Decentralized vs. Centralized

7. Organizational Structure • Functional areas impacting disbursements • Treasury department • Accounts payable department • Production • Purchasing department • Personnel department

8. Disbursement Systems • Simple • Complex systems

9. Simple Systems • Manual and paper-based • Demand deposit accounts • Payroll services • Drafts • Account reconciliation

10. Complex Systems • Paper-based systems • Account funding • Electronic disbursing systems • Electronic data interchange

11. Disbursement System Trends • Comprehensive payables • Purchase cards • Payables security/fraud prevention • Use of Internet for ordering and payment

12. Global Disbursing Systems • System differences • International disbursing risks • Intracompany payments

13. Optimizing the System • Selecting the optimal disbursing mechanism • Establishing a disbursement network • Selection of the disbursement bank(s) and location(s) • Selection of the funding mechanism(s) for the disbursing accounts

14. 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)]

15. A Model for Selecting Bank(s) and Location(s) Based on the Lockbox Cost Function • Max:Net Profit = N [(F x D x i) - VC] - FCwhere: • N = number of checks • F = Average Face Value • i = Daily Opportunity Rate • VC = Per Item Processing Cost • FC = Fixed Cost

16. 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.