Chapter 11 Cash Disbursement Systems

Order Placed

Order Received < Inventory >

Payment Sent Cash Received Accounts Collection < Receivable > < Float >

Sale

Time ==>
Accounts < Payable > Disbursement < Float >

Invoice Received

Payment Sent Cash Disbursed Copyright 2005 by Thomson Learning, Inc.

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.

Copyright 2005 by Thomson Learning, Inc.

Disbursement Policy: 4 Principles

Maximize value through payment timing Optimize the accuracy and timeliness of information Minimize balances in disbursement accounts Prevent fraud

Copyright 2005 by Thomson Learning, Inc.

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

Copyright 2005 by Thomson Learning, Inc.

Cash Flow Timeline

Disbursement Float Mail Float Processing Float Clearance Float Availability Float Slippage

Drawee bank account debited Payee receives collected funds Payee deposits check Payee or lockbox receives check Drawee writes and mails check
Copyright 2005 by Thomson Learning, Inc.

Decentralized vs. Centralized

Copyright 2005 by Thomson Learning, Inc.

Organizational Structure

Functional areas impacting disbursements

Treasury department Accounts payable department Production Purchasing department Personnel department

Copyright 2005 by Thomson Learning, Inc.

Disbursement Systems

Simple Complex systems

Copyright 2005 by Thomson Learning, Inc.

Simple Systems

Manual and paper-based Demand deposit accounts Payroll services

Drafts
Account reconciliation

Copyright 2005 by Thomson Learning, Inc.

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

Copyright 2005 by Thomson Learning, Inc.

Disbursement System Trends

Comprehensive payables Purchase cards Payables security/fraud prevention Use of Internet for ordering and payment

Copyright 2005 by Thomson Learning, Inc.

Global Disbursing Systems

System differences International disbursing risks Intracompany payments

Copyright 2005 by Thomson Learning, Inc.

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

Copyright 2005 by Thomson Learning, Inc.

A PV Model for Optimal Disbursing Mechanism

Present value of check payment A PVc = ------------------ + VCc [1 + i(nc + cc)]

Present value of electronic payment

A PVe = ------------------ + VCe [1 + i(ne + ce)]
Copyright 2005 by Thomson Learning, Inc.

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] - FC where:

N = number of checks F = Average Face Value i = Daily Opportunity Rate VC = Per Item Processing Cost FC = Fixed Cost

Copyright 2005 by Thomson Learning, Inc.

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.

Copyright 2005 by Thomson Learning, Inc.