1. Chapter 11 Cash Disbursement Systems
Order Order Sale Payment Sent Cash
Placed Received Received
Accounts Collection
< Inventory > < Receivable > < Float >
Time ==>
Accounts Disbursement
< Payable > < Float >
Invoice Received Payment Sent Cash Disbursed

2. Cash Flow Timeline Disbursement Float Mail Processing Clearance
Float Float Float
Availability Clearing
Slippage
Float
Drawee bank
account debited
Payee receives collected funds
Payee deposits check
Payee or lockbox receives check
Drawee writes and mails check

3. Disbursement Policies
Disbursement Policy: The manner in which firm’s financial obligations are settled.
Maximize value through payment timing
Ethics
Minimize idle balances in disbursement accounts
Optimize the accuracy and timeliness of information
Prevent fraud

4. Centralized vs. Decentralized Disbursement
Centralized Disbursement - Allows the staff at the corporate headquarters to oversee and initiate each disbursement.
Treasury department can easily determine the overall cash position
Provides more accurate short term cash flow forecasts.
Elimination of duplicate disbursement accounts reduces cost
Higher disbursement float
Decentralized Disbursement– involves payments made by divisional offices or individual stores.
Faster than the centralized disbursement
Improved relationship with the customers
Hamper the efficiency of and control over disbursement accounts.
Narrowed investment opportunity
Hybrid Approach- Combination of centralized and decentralized disbursing where checks are issued at field operations, but being written on Central disbursing account

5. Disbursement Systems
Based on firm’s cash flow and banking relationship
Simple Disbursement Systems
Complex Disbursement Systems
For relatively predictable cash flows
For stronger bank relationships

6. Simple Disbursement Systems
Simple disbursement system use basic methods to fund disbursements, including cash from daily operations, maturing investments, paper based instrument
paper-based payment instruments
Check or Drafts
Account reconciliation service-
Bank is provided a record of checks drawn
Paid only reconciliation
Range reconciliation
Full reconciliation
Positive Pay
Reverse Positive Pay

7. Complex Disbursement Systems
Uses both
Paper-based systems
Electronic disbursing systems
Multiple-drawee checks
Purchase order with payment voucher attached
Controlled Disbursement account
Zero Balance Account (ZBA)

8. Optimizing the Disbursement System
NPV = PV of Net cash flow - Initial investment
PV of Net cash flow = (# of payments × Savings per payment)/ Cost of Capital

9. 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)]

10. 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.