Professional Documents
Culture Documents
Objective
Disbursement Policy: 4
Principles
Types of Disbursement
Decisions
Disbursement Decisions
Centralized VS Decentralized
disbursing
Primarily Decentralized
System
Primarily decentralized
Systems
Advantages
More autonomy to field managers
Relationship with the payee enhanced.
Disadvantages
Larger balances need to be kept
Disbursement float is lower
Risk of unauthorized disbursement
Disadvantages
Autonomy of the field manager is reduced
Relationship with the payee is strained
Extra processing time may result in missed
discounts.
Payment system
Ethics and organizational policies
Decentralized v.s. centralized disbursements
Organizational structure
Banking system
Treasury information system
Cash flow characteristics
Payment system
Decentralization Vs
Centralization disbursement
Decentralized disbursement
Organizational Structure
Payor receives
invoice
Payor mails
check
Disbursement
Float
Payment float
Processing
Float
Clearing
Float
Availability
Float
Slippage
Bank debits
payors accnt
Payee receives good funds
Components of Disbursement
float
An example
XYZ Garments pays suppliers with paper checks. Invoices are net 30 and
XYZ usually mails check an average of 30 days from the invoice date. Mail
time from XYZ to suppliers averages 4 calendar days. Most checks are
received by lockboxes and processed on average .5 day after receipt.
Clearing time back to XYZ disbursement bank averages 1.5 days. An
average of $ 36500000 is disbursed to suppliers every year. The opportunity
cost is 10 % per annum.
The payment float associated with the disbursement systemPayment initiation time = 30.0 days
Mail time
= 4.0 days
Processing time
= 0.5 days
Presentation time
= 1.5 days
36.0 days
Value of payment float = $ 36500000/365 X .10 X 36 days = $ 360000 per year
An Example (Cont.)
Missed discount
Another example
XYZ Garments pays suppliers with paper checks. Invoices are 2/10,
net 30 and XYZ usually mails check an average of 30 days from the
invoice date. Mail time from XYZ to suppliers averages 4 calendar
days. Most checks are received by lockboxes and processed on
average .5 day after receipt. Clearing time back to XYZ
disbursement bank averages 1.5 days. An average of $ 36500000 is
disbursed to suppliers every year. The opportunity cost is 10 % per
annum.
The payment float associated with the disbursement systemPayment initiation time = 30.0 days
Mail time
= 4.0 days
Processing time
= 0.5 days
Presentation time
= 1.5 days
36.0 days
Another example
(Continuation)
PV of payment float = $ 36500000
{1 + (36 X .10)/365}
= $ 36140000 with no discount
PV of payment float = $ 36500000 (1-.02)
{1 + (16 X .10)/365}
= $ 35610000 with availing discount
Transaction costs
Disbursement tools
Reconciliation service
Assembling a list of checks presented
against the disbursement account and
comparing the list to the checks written.
Stop Payment Services
Issued to the disbursement bank by the firm
to recall a check issued earlier.
Sweep Account
Automatic investment service for disbursement account
After clearing the excess balance above some desired level is
automatically invested in overnight investments.
It reduce excess balance and lower administrative costs.
Payable through drafts (PTD)
Appear as checks but are drawn on the issuing form instead of
disbursement bank.
The firm will have one day time to verify the authorized amount
and ensure that other conditions have been met.
Controlled Disbursing
Account
Remote Disbursing
Dual balances
Payee relationship