You are on page 1of 11

Cash Concentration Strategies

‡ Concentration is sometimes a neglected part of cash management because a firm tend to think that when the cash is in their banking system,the battle is over.but there is a significant managerial decisions that must still be made to insure that cash is moved efficiently in accounts where it can be benefited the firm.it is useful to gather these balances from lockbox bank into central bank account.the process of collecting fund is called cash concentration.

Cash concentration is advantageous for following reasons: 

Collection process leads to larger pool of funds
which increases interest earning as well as reduces transaction costs.  With all cash in central location,keeping track on cash is easy  Short term borrowing:if deposits are routinely transferred to concentration bank ,the finance manager need not to plan about what to do with cash balances.  Facilitates short term investment.

Deposit Bank 1

Cash Concentration System

Deposit Bank 2

Short term borrowing / Investment

Disbursement Bank 1

Deposit Bank 3

Concentration Bank

Disbursement Bank 2

Deposit Bank 4

A concentration bank is a bank designated by a firm to perform following tasks:  Receive deposit from banks in firms collection system  Transfer funds to disbursement banks  Serve as focal point for short term credit and investment transactions: to perform this function cash in concentrated banks are monitored .when level of cash become high, extra cash is moved to short term investment .if level is low then cash is collected by sale of short term investments or from a draw on short term borrowing.this is the process of aggregate cash position management.

Other functions Balance reporting function:such Reporting gather information From the firms banking system and provide a daily report of forms deposits, disbursements and balances Source of forms short term liquidity and short term investment Assistance in preparing concentrating transfers

Objective Function Of Cash Concentration Cash concentration Costs arise from Various Sources Minimize opportunity cost of excess balances +transaction Cost - Interest on Dual balances +Administrative cost + Control costs. The dual balance factor has a negative sign because as dual balances increases. Costs are reduced. dual balances arise in concentration system because of inefficiencies in transfer clearing mechanism. such balances generally occur when a deposit in to concentration bank receives availability at the concentration bank before the transfer clears the field bank. during the time of the overlap, the firms owns the same credit at two different banks

Basic types of concentration systems Field banking system ± collect cash Over the counter deposit ± collect mail deposit. Techniques for reducing Cash concentration Cost Reducing information, Processing and Clearing Delays. Anticipation ±Moving transfer initiation Forward Ledger anticipation. Deposit anticipation Faster Transfer mechanisms Reducing transfer cost Balance Averaging Reducing Administration Costs 

Administrative Control System. Improving Concentration Control. 

Information and Processing Delay: Delay occurs in receiving information from field managers. Irregular reporting habits. Anticipation Anticipation means initiating a transfer at the concentration bank before cash become available at deposit bank. ‡Ledger anticipation ‡Deposit anticipation :to initiate a concentrating transfer before expected deposits in a deposit bank have been reported.Deposit anticipation is more risky than ledger anticipation,since there is no guarantee that the amount will be deposited. 

Faster transfer mechanisms: Another way to reduce excess balances is to employ a faster transfer mechanism where excess balance is high. Reducing transfer Cost: To use a break even analysis Balance averaging.