Disbursement Systems

Disbursement system Include bank and the delivery mechanisms and procedures firm use to facilitate the movement of cash from firms centralized cash pool to disbursement banks and then on to suppliers.

The concentration bank serves as the valve between firms collection systems, liquidity portfolio and disbursement banks

Disbursement banks are the banks on which disbursement banks are drawn.

• A disbursement system may be more complex than a collection system in one sense:

Management has to choose not only the disbursement banks but also the cheque issuing points.

More complex if some issuing bank issue cheques on disbursement bank 1 and some on disbursement bank 2.

It may be simpler

in a sense that disbursement generally falls under more direct control of headquarters and generally involves a fewer bank.

with this control however comes the possibility of ethical problems because disbursement practices can lead to intentionally delayed payment and strained vender relations.

• Objective Function• The function of a disbursement system is to process

the payment obligation to vendor employees and creditors.

• In attempting the present value of the firm, it is beneficial to delay the time at which value is transferred from the firm in a disbursement system .

• However any potential gain in value must be balanced against cost of the delay.

• Maxmise

+value of disbursement Float

-loss of discount for early payment

-cost of excess balance in disbursement system

- transaction cost

+ value of payee relation

+ the value from any dual balances

- administrative, information and control costs

• Value Of Disbursement float

There ia value in delayed payments because either the firm can invest cash for a longer time or put off the cost of obtaining cash from lenders and investors.

Elements of cash outflow timeline:

payment initiation mail

mail float

processing float

presentation float

Any delay in above segment is beneficial to firm.

• Mail float: measures as the time between payers mailing of ceque and payees receipt of it.

• Processing Float: the time required by the payee to deposit the cheques after it has been received

• Presentation or clearing Float :the time required by the banking system to return the cheque and return it against the payers disbursement account.

Disbursement Tools

• Zero Balance Account

• Controlled Disbursing

Zero Balance Account

• Common strategy For funding disbursements as cheques are presented.

• In this strategy an account for disbursement is established in bank.

• For the zero balance system to be effective ,participating bank must be one on which most disbursements are made that the clearance system which presents disbursement to banks early in the morning and not the bank disbursement occur through out the day.

• The firm does not keep permanent stock of cash in disbursing account. Instead the participating bank agrees that when morning disbursement for a firm presented to it,the bank will advise the firm of the amount of the cash required to cover these disbursements.

• The money will be transferred in to zero balance account and cheques are honoured.

Controlled Disbursing

• Used when firm receives cheques through out the day.

• In this the firm project the amount of cheques to arrive each day to disbursement bank based on cheques written in previous days and historic statistic on disbursement float .

• Firm does not know exactly what outstanding cheques will be presented on particular day. so procedure is subject to error.

• To hedge the uncertainty some safety stock of cash is also kept.