1. Copyright  2005 by Thomson Learning, Inc. Chapter 11 Cash Disbursement Systems 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 Identify the environmental variables influencing disbursement decisions. v Identify the major disbursement mechanisms, relevant institutional aspects, and major implementation variations. v Specify the major funding alternatives for disbursement accounts. v Conduct valuation of payment mechanism decisions. v State the contribution of and steps involved in disbursement location model applications.

3. Copyright  2005 by Thomson Learning, Inc. Disbursement Policy: 4 Principles v Maximize value through payment timing v Optimize the accuracy and timeliness of information v Minimize balances in disbursement accounts v Prevent fraud

4. Copyright  2005 by Thomson Learning, Inc. Cash Disbursements and the Cash Flow Timeline v Payment system v Ethics and organizational policies v Decentralized v.s. centralized disbursements v Organizational structure v Banking system v Treasury information system v Cash flow characteristics

5. Copyright  2005 by Thomson Learning, Inc. Cash Flow Timeline Mail Processing Clearance Float Float Float Availability Slippage Float Float Drawee writes and mails check Drawee writes and mails check Payee or lockbox receives check Payee deposits check Payee deposits check Payee receives collected funds Payee receives collected funds Drawee bank Drawee bank account debited account debited Disbursement Float

6. Copyright  2005 by Thomson Learning, Inc. Decentralized vs. Centralized

7. Copyright  2005 by Thomson Learning, Inc. Organizational Structure v Functional areas impacting disbursements –Treasury department –Accounts payable department –Production –Purchasing department –Personnel department

8. Copyright  2005 by Thomson Learning, Inc. Disbursement Systems v Simple v Simple v Complex systems

9. Copyright  2005 by Thomson Learning, Inc. Simple Systems v Manual and paper-based v Demand deposit accounts v Payroll services v Drafts v Account reconciliation

10. Copyright  2005 by Thomson Learning, Inc. Complex Systems v Paper-based systems v Account funding v Electronic disbursing systems v Electronic data interchange

11. Copyright  2005 by Thomson Learning, Inc. Disbursement System Trends v Comprehensive payables v Purchase cards v Payables security/fraud prevention v Use of Internet for ordering and payment

12. Copyright  2005 by Thomson Learning, Inc. Global Disbursing Systems v System differences v International disbursing risks v Intracompany payments

13. Copyright  2005 by Thomson Learning, Inc. Optimizing the System v Selecting the optimal disbursing mechanism v Establishing a disbursement network v Selection of the disbursement bank(s) and location(s) v Selection of the funding mechanism(s) for the disbursing accounts

14. Copyright  2005 by Thomson Learning, Inc. A PV Model for Optimal Disbursing Mechanism v Present value of check payment A PV c = ------------------ + VC c [1 + i(n c + c c )] v Present value of electronic payment A PV e = ------------------ + VC e [1 + i(n e + c e )]

15. Copyright  2005 by Thomson Learning, Inc. A Model for Selecting Bank(s) and Location(s) Based on the Lockbox Cost Function v Max: Net Profit = N [(F x D x i) - VC] - FC where: –N = number of checks –F = Average Face Value –i = Daily Opportunity Rate –VC = Per Item Processing Cost –FC = Fixed Cost

16. Copyright  2005 by Thomson Learning, Inc. Summary v Objective of a disbursement system: pay with the right method, at the right time, in an efficient manner. v Disbursement systems are simple and complex. v Simple systems tend to be paper based and use basic funding mechanisms. v Complex or sophisticated systems are prone to use electronic payments, controlled disbursement accounts and ZBAs with electronic funding of the accounts. v Disbursement systems should be well coordinated with cash collection and cash concentration systems.