1. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Received Payment Sent Cash Disbursed Invoice Received Payment Sent Cash Disbursed Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection Accounts Collection Time ==> Time ==> Accounts Disbursement Accounts Disbursement Invoice Received Payment Sent Cash Disbursed Invoice Received Payment Sent Cash Disbursed

2.  Understand the need for a cash concentration system.  Formulate a cash transfer decision model.  Understand the advantages and disadvantages of the different cash transfer tools.

3.  Move funds from dispersed bank accounts to firm’s primary bank (Concentration bank)  Cash concentration increase firm value by reducing opportunity cost of idle fund.  Improves treasury department’s control over excess cash.

4. Original deposit at field bank Original deposit at field bank Deposit reported Deposit reported Collected funds at the field bank Collected funds at the field bank Transfer initiated Transfer initiated Balance available at the concentration bank Debit field bank Debit field bank account T1 T2 T3 T4 T5 T6 T2 T3 T4 T5 T6 The concentration system affects cash at points T3, T5 and T6.

5. RegionalConcentration Bank 1 RegionalConcentration RegionalConcentration Bank n RegionalConcentration Gathering Bank 1 Gathering Gathering Bank 2 Gathering Gathering Bank n Gathering Gathering Bank 1 Gathering Gathering Bank 2 Gathering Gathering Bank n Gathering CentralConcentrationBank Customers...Customers...Customers...Customers... Wire or ACH (Automated Clearing House Wire or ACH Lockbox Lockbox Lockbox

6.  Decentralized Transfer Initiation  Decentralized Transfer Initiation– field office or collection endpoint manager initiates a transfer o The transfer amount is generally the amount of deposit  Centralized Transfer Initiation  Centralized Transfer Initiation– initiated by the concentration bank, this bank chooses the timing and dollar amount of the transfer. o Advantage: managers at corporate headquarters have better control.

7.  Depository transfer checks (DTC) – non-negotiable, usually unsigned, check payable to a single bank account at a particular bank. - beneficial for concentrating relatively small transfer - now obsolete because of growth in electronic payments  ACH (Automated clearing house) or EDT (Electronic depository transfers) –settlement usually occurs one day later; not very expensive  Wire transfer – real time transfer; expensive

8.  Transfer costs Wire transfer costs between $15 to $20 EDT costs roughly $0.25  Administrative costs

9.  Opportunity cost of idle balances  Economies of scale  Enhanced visibility and control over balances

10.  Minimum transfer balance Incremental Benefit Incremental Benefit = TBAL {DS/365} {i – [ECR (1-rrr)]} Here, DS= the number of days saved with the faster transfer method i= annual opportunity cost ECR= the earnings credit rate rrr= the required reserve ratio TBAL= the balance to be transferred Tbal = ______Incremental cost_______ {DS/365} x {i – [ECR(1-rrr)]}

11. Total Cost = Fee + {(i/365) x (ACB - RCB)} Where: Required Collected Balance = (SC - Fee)/ECR(1-rrr) Here, Fee= total service charge paid through fees i= annual opportunity cost ACB= Average Collected Balance SC= Service Charge ECR= the earning credit rate rrr= the required reserve ratio

12.  Daily transfer: simplest and most common rule, transfer the daily deposit to concentration bank  Managing about a target: set a target transfer level one-time transfer out to earn interest reduces the number of transfers thus reduces transfer cost  Anticipation: initiate transfer prior to deposit  Weekend Timing