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.