1. Copyright  2002 by South-Western, a division of Thomson Learning TM Chapter 11 Cash Disbursement Systems Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Received Sent Paid Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Received Sent Paid

2. Copyright  2002 by South-Western, a division of Thomson Learning TM Learning Objectives v To identify the environmental variables influencing disbursement decisions v To identify the major disbursement mechanisms, relevant institutional aspects, and major implementation variations v To specify the major funding alternatives for disbursement accounts v To conduct valuation of payment mechanism decisions v To state the contribution of and steps involved in disbursement location model applications

3. Copyright  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM 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  2002 by South-Western, a division of Thomson Learning TM Cash Flow Timeline Mail Processing Clearing Float Float Float Availability Slippage Float Float Payor puts check in the mail Payor puts check in the mail Payee receives check Payee deposits check at bank Payee deposits check at bank Payee receives good funds Payee receives good funds Bank debits Bank debits payor’s accnt payor’s accnt Disbursement Float

6. Copyright  2002 by South-Western, a division of Thomson Learning TM Decentralized vs. Centralized

7. Copyright  2002 by South-Western, a division of Thomson Learning TM Organizational Structure v Functional areas impacting disbursements –Treasury department –Accounts payable department –Production –Purchasing department –Personnel department

8. Copyright  2002 by South-Western, a division of Thomson Learning TM Disbursement Systems v Simple v Simple v Complex systems

9. Copyright  2002 by South-Western, a division of Thomson Learning TM Simple Systems v Manual and paper-based v Demand deposit accounts v Payroll services v Drafts v Account reconciliation

10. Copyright  2002 by South-Western, a division of Thomson Learning TM Complex Systems v Paper-based systems v Electronic disbursing systems v Electronic data interchange

11. Copyright  2002 by South-Western, a division of Thomson Learning TM Disbursement System Trends v Comprehensive payables v Purchasing cards v Payables security/fraud prevention v Use of Internet for ordering and payment

12. Copyright  2002 by South-Western, a division of Thomson Learning TM Global Disbursing Systems v System differences v International disbursing risks v Intracompany payments

13. Copyright  2002 by South-Western, a division of Thomson Learning TM Optimizing the System v Selecting the optimal disbursing mechanism v Establishing a disbursement network v Selection of the disbursement bank(s) v Selection of the funding mechanism(s) for the disbursing accounts

14. Copyright  2002 by South-Western, a division of Thomson Learning TM A Model 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

15. Copyright  2002 by South-Western, a division of Thomson Learning TM 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