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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.

 Specify the major funding alternatives for disbursement accounts. relevant institutional aspects.  Identify the major disbursement mechanisms. and major implementation variations. Inc.  Copyright  2005 by Thomson Learning.Learning Objectives Identify the environmental variables influencing disbursement decisions. .  State the contribution of and steps involved in disbursement location model applications.  Conduct valuation of payment mechanism decisions.

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. .

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.

. Inc.Disbursement System Trends Comprehensive payables  Purchase cards  Payables security/fraud prevention  Use of Internet for ordering and payment  Copyright  2005 by Thomson Learning.

.Global Disbursing Systems System differences  International disbursing risks  Intracompany payments  Copyright  2005 by Thomson Learning. Inc.

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.

.A PV Model for Optimal Disbursing Mechanism  Present value of check payment A PVc = -----------------. Inc.+ VCe [1 + i(ne + ce)] Copyright  2005 by Thomson Learning.+ VCc [1 + i(nc + cc)]  Present value of electronic payment A PVe = -----------------.

.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.VC] . 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) .

Inc.  Complex or sophisticated systems are prone to use electronic payments.Summary Objective of a disbursement system: pay with the right method.  Disbursement systems are simple and complex.  Simple systems tend to be paper based and use basic funding mechanisms. in an efficient manner. . controlled disbursement accounts and ZBAs with electronic funding of the accounts.  Copyright  2005 by Thomson Learning. at the right time.  Disbursement systems should be well coordinated with cash collection and cash concentration systems.