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.
Cash Flow Timeline
3
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.

The firm is a system of cash flows.

These cash flows are unsynchronized and uncertain.
Cash Disbursement
4



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.
Cash Disbursement
5
Types of Disbursement Systems
6
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.
Complexity of Disbursement Systems
7
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.
Simple Disbursement System
8
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.
Complex Disbursement System
9


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 midmorning, 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.
Centralized Cash Concentration
10


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.
Treasury Management Services
11


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.
Evaluation of Disbursement
12

Should a firm change method of payment?
N (CC  C N )
NPV 
 C0
 i 
 
 12 
 Where:
= # 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
N