Cash Concentration Strategies

• Concentration is sometimes a neglected part of cash

management because a firm tend to think that when
the cash is in their banking system,the battle is
over.but there is a significant managerial decisions
that must still be made to insure that cash is moved
efficiently in accounts where it can be benefited the
firm.it is useful to gather these balances from lockbox
bank into central bank account.the process of
collecting fund is called cash concentration.
 Cash concentration is advantageous for following
reasons:
 Collection process leads to larger pool of funds
which increases interest earning as well as reduces
transaction costs.
 With all cash in central location,keeping track on cash
is easy
 Short term borrowing:if deposits are routinely
transferred to concentration bank ,the finance
manager need not to plan about what to do with cash
balances.
 Facilitates short term investment.
Deposit
Cash Concentration System
Bank
1

Short term Disbursement

Deposit borrowing / Bank
Bank Investment 1
2

Deposit
Bank Disbursement
3 Concentration Bank
Bank 2

Deposit
Bank
4
A concentration bank is a bank designated by a firm to
perform following tasks:

 Receive deposit from banks in firms collection system

 Transfer funds to disbursement banks
 Serve as focal point for short term credit and investment
transactions: to perform this function cash in concentrated
banks are monitored .when level of cash become high,
extra cash is moved to short term investment .if level is low
then cash is collected by sale of short term investments or
from a draw on short term borrowing.this is the process of
aggregate cash position management.
Other functions
Balance reporting function:such Reporting gather
information From the firms banking system and provide a
daily report of forms deposits, disbursements and balances
Source of forms short term liquidity and short term
investment
Assistance in preparing concentrating transfers
 Objective Function Of Cash Concentration
Cash concentration Costs arise from Various Sources

Minimize opportunity cost of excess balances

+transaction Cost
- Interest on Dual balances
+Administrative cost
+ Control costs.
The dual balance factor has a negative sign because as dual balances
increases. Costs are reduced. dual balances arise in concentration
system because of inefficiencies in transfer clearing mechanism.
such balances generally occur when a deposit in to concentration
bank receives availability at the concentration bank before the
transfer clears the field bank. during the time of the overlap, the
firms owns the same credit at two different banks
Basic types of concentration systems
Field banking system – collect cash
Over the counter deposit – collect mail deposit.
Techniques for reducing Cash concentration Cost
Reducing information, Processing and Clearing Delays.
Anticipation –Moving transfer initiation Forward
Ledger anticipation.
Deposit anticipation
Faster Transfer mechanisms
Reducing transfer cost
Balance Averaging
Reducing Administration Costs
Administrative Control System.
Improving Concentration Control.
Information and Processing Delay:
Delay occurs in receiving information from field
managers.
Irregular reporting habits.
Anticipation
Anticipation means initiating a transfer at the
concentration bank before cash become available at
deposit bank.
•Ledger anticipation
•Deposit anticipation :to initiate a concentrating transfer
before expected deposits in a deposit bank have been
reported.Deposit anticipation is more risky than ledger
anticipation,since there is no guarantee that the amount
will be deposited.
Faster transfer mechanisms:
Another way to reduce excess balances is to employ a
faster transfer mechanism where excess balance is high.
Reducing transfer Cost:
To use a break even analysis
Balance averaging.