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Chapter 10 Cash Concentration

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.

Understand the advantages and disadvantages of the different cash transfer tools.Learning Objectives  Understand the need for a cash concentration system.   Copyright  2005 by Thomson Learning. Formulate a cash transfer decision model. . Inc.

Inc.1 Cash transfer tools Initiation of the transfer System costs Benefits of the system Copyright  2005 by Thomson Learning.Basic Structure      Exhibit 10. .

Inc.. Copyright  2005 by Thomson Learning.1 Central Concentration Bank Lockbox Regional Concentration Bank 1 Gathering Bank 1 Gathering Bank 2 Regional Concentration Bank 2 Gathering Bank 2 Gathering Bank n Wire or ACH Lockbox DTC or ACH Gathering Bank n Gathering Bank 1 Customers. Customers...Exhibit 10.. .

Cash Transfer Tools    Depository transfer checks ACH or EDT Wire transfer Copyright  2005 by Thomson Learning. . Inc.

Inc. .Initiation of the Transfer   Decentralized Centralized Copyright  2005 by Thomson Learning.

Inc.System Costs    Opportunity cost of idle balances Transfer costs Administrative costs Copyright  2005 by Thomson Learning. .

.Benefits of the System    Economies of scale Enhanced visibility and control of balances Dual balance possibilities Copyright  2005 by Thomson Learning. Inc.

. Inc.The Cash Flow Timeline T1 T2 T3 T4 T5 T6 Debit field bank account Balance available at the concentration bank Transfer initiated Collected funds at the field bank Deposit reported Original deposit at field bank Copyright  2005 by Thomson Learning.

Cash Transfer Scheduling    Complicating factors Objective: minimize transfer costs Transfer rules Copyright  2005 by Thomson Learning. . Inc.

clearing of transfer instrument Weekends Copyright  2005 by Thomson Learning.  .s. Inc.Complicating Factors  Minimum transfer balance – Set incremental cost = Days Saved x ((k .ecr(1-rr)/365]  Fluctuating daily deposits   Deposits with different availabilities Availability of deposits v.ecr(1-rr)) x TBAL – Solve for TBAL – TBAL = Incremental cost/DS x [k .

RCB)) Where: RCB = (SC . Inc. .Fee)/ecr(1-rr) Copyright  2005 by Thomson Learning.Objective: Minimize Transfer Costs   Subject To: adequate bank compensation TC = Fee + (k x (ACB .

.Transfer Rules   Daily transfer: transfer the daily deposit Managing about a target: – one-time transfer out to earn interest – reduces the number of transfers  Anticipation: initiate transfer prior to deposit Copyright  2005 by Thomson Learning. Inc.

 The chapter developed an objective function for the cash transfer scheduling problem. Inc.Summary A collection system such as a lockbox necessitates the development of a concentration system. .  Three transfer scheduling rules were identified and discussed.  This chapter discussed the structure of a cash concentration system and identified the advantages and disadvantages.  Copyright  2005 by Thomson Learning.  The chapter concluded by comparing cash concentration characteristics.