1. Copyright  2005 by Thomson Learning, Inc. Chapter 10 Cash Concentration 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. Copyright  2005 by Thomson Learning, Inc. Learning Objectives v Understand the need for a cash concentration system. v Formulate a cash transfer decision model. v Understand the advantages and disadvantages of the different cash transfer tools.

3. Copyright  2005 by Thomson Learning, Inc. Basic Structure v Exhibit 10.1 v Cash transfer tools v Initiation of the transfer v System costs v Benefits of the system

4. Copyright  2005 by Thomson Learning, Inc. Exhibit 10.1 RegionalConcentration Bank 1 RegionalConcentration RegionalConcentration Bank 2 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 DTC or ACH Lockbox Lockbox Lockbox

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

6. Copyright  2005 by Thomson Learning, Inc. Initiation of the Transfer v Decentralized v Centralized

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

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

9. Copyright  2005 by Thomson Learning, Inc. The Cash Flow Timeline 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

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

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

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

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

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