1. Short-Term Financial Management
Chapter 11 – Cash Disbursement Systems

2. Chapter 11 Agenda
Identify the components of disbursement float, discuss the factors influencing disbursement policies, describe various disbursement products, and apply discounted cash flow techniques to disbursement decisions.

3. Cash Flow Timeline The firm is a system of cash flows.
These cash flows are unsynchronized and uncertain.
The cash conversion period is the time between when cash is received versus paid.
The shorter the cash conversion period, the more efficient the firm’s working capital.

4. Cash Disbursement
Once a firm writes a check, it must maintain adequate balances to cover it.
Generally, the firm maintains these funds on deposit, even though disbursement float results in a delay before the check is presented for payment.
Checks are presented throughout the day, requiring firms to maintain necessary balances.

5. Cash Disbursement

6. Types of Disbursement Systems
Firms have two, basic disbursement system options:
Centralized Disbursement
The firm initiates all disbursements from a single location.
Ensures accounts are funded, enhances control, and minimizes fraud and duplication; increases float.
Decentralized Disbursement
Individual sites are empowered to initiate disbursements for their areas of control.

7. Complexity of Disbursement Systems
Regardless of disbursement system type, the complexity of the system includes options:
Simple
The firm initiates all disbursements using checks or other non-cash payment methods.
Complex
Firms engage their banking network to manage disbursements.

8. Simple Disbursement System
If the firm is initiating the disbursement, two options (which vary in cost and performance) include:
Paper Checks
The firm enjoys longer float.
Checks are more expensive than electronic options.
ACH (Automated Clearing House)
Only collected funds can be transferred.

9. Complex Disbursement System
Checks are presented throughout the day, requiring firms to maintain necessary account balances to fund them.
Banks provide cash disbursement services, called Controlled Disbursement Accounts, which, by mid- morning, provides the firm with a daily total of checks being presented for payment that night; this is information the firm could not otherwise know.
Any later presentments are held over until the next day.
The firm can fund only those checks being presented.

10. Centralized Cash Concentration
Banks provide concentration services to electronically pool funds from multiple banks into a single bank.
If one bank is used, but the firm has many accounts, Zero-Balance Services can be structured so that all ‘junior’ account balances are ‘swept’ nightly into the ‘senior’ account.
Bank statements are produced to simulate account activity as if the account had been stand-alone.
The bank can automatically ‘sweep’ (automated investment) remaining funds into either an overnight investment account or to pay down (or off) outstandings under a line of credit.
Investment account funds are returned to the account the next morning.

11. Treasury Management Services
Bundling Lockbox, Controlled Disbursement, Zero Balance, and Automated Investment allows a firm to expedite the receipt, processing, and clearing of remittances, which are deposited into segregated accounts but swept nightly to a single account for efficient overnight investment and/or loan reduction.
Concurrently, invested balances are maximized since account balances are reduced to the level required to cover daily check presentments.

12. Evaluation of Disbursement
Should a firm change method of payment?
Where:
N = # of payments per month
CC = Cost per current payment method
CN = Cost per new payment method
C0 = Cost to change methods
i = Annual cost of capital