INSTRUCTIONAL MATERIAL

Treasury Management
(FIMA 40103)

WEEK 8
CASH MANAGEMENT

Learning Objectives:

 Differentiate cash transfer methods

CASH TRANSFER METHOD

There are implications of different methods of transferring cash to or from a company that
a treasurer should understand, since there are significant differences in the costs and cash flow
speed of each one. The level of manual processing and related controls is significantly different
for each kind of transfer, which has a major impact on the long - term efficiency of the finance and
accounting functions.

Check Payments

A check payment is a negotiable instrument drawn against deposited funds, to pay

the recipient a specific amount of funds on demand. A check has traditionally been physically
routed from the payer to the payee, then to the payee's bank, which issues funds to the
payee, and then by the payee's bank to the payer's bank. The payer's bank then shifts funds
from the payer's account to the payee's bank, thereby settling all accounts.

The vast majority of checks are issued directly by companies. However, they may also be
issued directly by a bank, which is called a bank check or bank draft. The bank check is a payment
on behalf of the payer, which is guaranteed by the bank (and therefore of value to the payee).
The bank can safely issue this guarantee because it immediately debits the payer’s account for
the amount of the check, and therefore has no risk.

Daren D. Cortez, CFMP, CATP, MBA

Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
 INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)

The Check Payment Process

The check payment process begins when a drawer writes a check on his or her account
at a bank. The person who takes possession of a check is the holder. After the check is written,
the next step in the check payment process is for the payee to accept the check. Individuals,
businesses, and banks can accept checks without liability for claims and defenses if they are a
holder in due course. What the payee intends to do with the check depends on whether the
endorsement is blank, special, or restrictive. The endorsed check is then accepted by a depositary
bank, which also endorses it. A bank is required to honor a check that is properly payable. Failing
to do so could make the bank liable to the customer for wrongful dishonor. A bank will pay an on-
us check and may cash a check drawn on another bank, which carries more risk. Once a check
is accepted by the depositary bank for cash, payment, or deposit, it is processed for collection.
Checks are proofed, encoded, read (captured), sorted (as on-us, local, and nonlocal), batched,
and with a cash letter, presented to the drawee through the selected clearing arrangement (direct
presentment, correspondent bank, clearing house, or Federal Reserve bank). The drawee
receives checks for in-clearing capture. In preparing the checks, the full MICR line is captured.
Data from capture runs are stored throughout the day and posted to accounts at close of business.
Checks rejected during posting are exception items that require special handling. Checks are
sorted daily in bundles by statement cycle and then filed. Once a month, customers receive
account statements either with paper checks or with check images.

Investing Float - Related Funds

If a company has significant cash holdings, then it may be worthwhile to spend time
investing in float - related funds. However, maintaining an abnormally small cash balance requires
active float monitoring on a daily basis. If there is a gap of even a single day in float monitoring,
then the company will very likely not have sufficient funds for all presented checks, and will incur
expensive account overage fees.

Value Dating

In banking, value dates refer to the date when account holders can use funds from
deposited checks that already passed through the bank’s clearing cycle

When an individual (payee) first deposits a check at their bank, the bank will credit the
payee’s account with the amount indicated on the check.

Daren D. Cortez, CFMP, CATP, MBA

Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
 INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)

However, the money’s not actually been received by the bank since they still need to
collect the funds from the bank of the other party (assuming that the parties involved use two
separate financial institutions). The bank faces a risk of incurring a negative cash flow if the payee
immediately uses the cash from the check.

To avoid such a situation, the bank will make an estimate of the day it expects to receive
the funds from the other bank, called the value date. The payee can only use the funds after the
value date; prior to the value date, the funds are held in the payee’s account The value date is a
few days later than the book date, but for larger bank customers, it may be possible to negotiate
for an earlier time before the value date is reached.

Check Payments through a Lockbox

Lockbox banking is a service provided by banks to companies for the receipt of payment
from customers. Under the service, the payments made by customers are directed to a special
post office box instead of going to the company.

For businesses that receive a large volume of payments or large-denomination checks

accompanied by remittance documents, a lockbox arrangement can streamline collections and
payment processing. Utilizing advanced lockbox technology, banks have established multiple
communication hubs for businesses to use to receive payments and deposits.

Remote Deposit Capture

Remote deposit capture is a technology-based method that lets banks accept checks for
deposit using electronic images instead of the original, physical, paper versions. It let banking
customers use their computers, tablets, or smartphones to conveniently deposit checks. Remote
deposit capture is not only more convenient for bank customers; it also benefits the banks
themselves.

Remote Disbursement

Remote disbursement involves the use of check payments that are drawn on remote bank
locations, thereby lengthening the duration of the disbursement float. At its most sophisticated
level of usage, a company can have multiple remote bank locations set up around the country,
and pay suppliers using bank accounts located the furthest from them.

Daren D. Cortez, CFMP, CATP, MBA

Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
 INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)

The usefulness of remote disbursement has declined over time, as central banks have
gradually driven down clearing times, with a particular emphasis on those regions where clearing
intervals are unusually long.

Wire Transfers

Wire transfers, which are also known as wire payments, allow money to be moved quickly
and securely without the need to exchange cash. They allow two parties to transfer funds even if
they're in different (geographic) locations safely. A transfer is usually initiated from one bank or
financial institution to another. Rather than cash, the participating institutions share information
about the recipient, the bank receiving account number, and the amount transferred.

ACH Payments

ACH (Automated Clearing House) is a network used for electronically moving money
between bank accounts across the United States. It’s run by an organization called Nacha.

ACH Debit

In an ACH debit transaction, one party agrees to pay another. To make that happen, the
party receiving payment sends a message to the ACH network asking it to collect said payment
and move the funds into their account.

Procurement Cards

A procurement card is a type of company charge card used for smaller purchases to
achieve greater cost efficiency, control and convenience. Procurement cards are also known as
purchasing cards, P-Cards or PCards.

Procurement cards can be tied to either a credit card or a bank account. The bank that
manages a procurement card will issue payments to payees within days, while providing monthly
invoicing to the client company

CASH PAYMENTS

Inbound cash payments tend to be for very small transactions, though possibly in very
high volume, especially in retail situations. However, business - to - business cash payments are
not common.

Daren D. Cortez, CFMP, CATP, MBA

Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines
 INSTRUCTIONAL MATERIAL
Treasury Management
(FIMA 40103)

Cash is bulky, requires significant controls to maintain on - site, and does not earn interest
income until deposited. Given the extra cost of counting it at the bank, it is also expensive to
deposit. Consequently, companies have a strong incentive to avoid both paying with or accepting
cash

Activities/ Assessment:

1. What are the better forms of cash transfer? Why?

2. Discuss the check payment process.

Daren D. Cortez, CFMP, CATP, MBA

Department of Financial Management
College of Accountancy and Finance
Polytechnic University of the Philippines