Lecture Financial Management 13 Jan

Slowing down cash payments:
Net float: The dollar difference between the company’s bank

balance and its book balance of cash is called net float (or
sometimes, just plain float).
Playing the float:

If the size of net float can be estimated accurately,
Bank balances can be reduced and the funds invested to earn a
positive return.
This activity has been referred to by corporate treasurers as “playing
the float.”
Good Cash Management:
Best technique as previously discussed is to slow down cash disbursement and minimize the time
for which cash is idle in your bank accounts.
For this companies normally uses more than one accounts and disbursement accounts are
separate from its main accounts.
If company has separate account company will shift required balance for disbursement accounts
and disbursements accounts not only transfer the disbursement where required but also invest the
idle funds in short term investments.
Computer Based
Many companies have developed sophisticated computer systems to provide the necessary
information and to transfer excess funds automatically.
More control on disbursements:
For tightly controlling disbursements is to centralize payables into a single account (or a small
number of accounts), presumably at the company’s headquarters.In this way, disbursements can
be made at the precise time they are desired.
Payable through drafts:

It is a mean for delaying disbursement: Unlike an ordinary check, the payable through draft is
not payable on demand. When it is presented to the issuer’s bank for collection, the bank must
present it to the issuer for acceptance. The funds are then deposited by the issuing firm to cover
payment of the draft.
Advantage of PTDs
The advantage of the draft arrangement is that it delays the time the firm actually has to have
funds on deposit to cover the draft.
Consequently, it allows the firm to maintain smaller balances at its banks
Disadvantages of PTDs
A disadvantage of a draft system is that certain suppliers may prefer checks.
Also, banks do not like to process drafts because they often require special manual attention.
As a result, banks typically impose a higher service charge to process drafts than they do to
process checks
Payroll and dividend disbursement:

Zero balance account
Disbursement float:
Total time between the mailing of a check by a firm and the check’s clearing the firm’s
checking accounts
Remote disbursement
A system in which the firm directs checks to be drawn on a bank that is geographically remote
from its customer so as to maximize check clearing time.
Controlled disbursement
A system in which the firm directs checks to be drawn on a bank (or branch bank) that is able to
give early or mid-morning notification of the total dollar amount of checks that will be presented
against its account that day
Outsourcing:
Companies these days want to pay attention towards core processes of their businesses – those
core competencies they possess to create and sustain a competitive advantage.
This is why companies normally shift an ordinarily “in-house” operation to an outside firm like
lockbox system was an example of cash collection through outsourcing.
Self test questions:

1. The Zindler Company currently has a centralized billing system. Payments are made by
all customers to the central billing location. It requires, on average, four days for
customers’ mailed payments to reach the central location. An additional day and a half is
required to process payments before a deposit can be made. The firm has a daily average
collection of $500,000. The company has recently investigated the possibility of initiating
a lockbox system. It has estimated that with such a system customers’ mailed payments
would reach the receipt location two and one-half days sooner. Further, the processing
time could be reduced by an additional day because each lockbox bank would pick up
mailed deposits twice daily.
a) Determine how much cash would be freed up (released) through the use of a lockbox
system
b) Determine the annual gross dollar benefit of the lockbox system, assuming the firm could
earn a 5 percent return on the released funds in Part (a) by investing in short term
instruments.
c) If the annual cost of the lockbox system will be $75,000, should such a system be
initiated?
Solution to self correction problem:

A) Total time savings = 2.5 days + 1 day = 3.5 days
Formula to find out cash released by reduction in days:
Cash released = total time saving x average daily collection

= 3.5 x $500,000 = $ 1750,000
b) 5% x 1750,000 = $ 87500
c) because the annual cost of lockbpx system is 75000 dollars and gain is $87500 so a
firm will get benefit by using this lockbox system so a firm should go for this option.
Solution

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Slowing down cash payments:

Net float: The dollar difference between the company’s bank

Playing the float:

Good Cash Management:

Payable through drafts:

Consequently, it allows the firm to maintain smaller balances at its banks

Payroll and dividend disbursement:

Self test questions:

Solution to self correction problem:

Formula to find out cash released by reduction in days:

Cash released = total time saving x average daily collection

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