Disbursements and Accounts Payable STCM Chapter 7,11 ECM Chapter 8

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Disbursements and Accounts Payable STCM Chapter
7,11ECM Chapter 8
Order Order Sale
Cash Placed Received
Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float
gt

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Paid
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Disbursement and A/P Objectives

• Reduce Costs
• Access Information
• Maintain Relationships
• Control and Fraud Prevention
• Manage Disbursement Float
• Understand the ethical issues involved in
  payables behavior

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Spontaneous Sources of Financing

• Definition
• a financing source occurring spontaneously from
  operations
• Examples
• payables
• accruals

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Costs Associated With Making Payments

• Opportunity Costs
• Transfer Costs
• Overdraft Costs

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Accounts Payable

• Open account
• Cash discount
• Seasonal dating
• Consignment

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Payables Decisions and the Cash Flow Timeline

Time
gt Purchase Cash Credit Date Discount
Date Period
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Basic Principles

• Never pay early, pay on the last day of
• the discount period, or
• the credit period
• Take a cash discount when
• implied interest rate gt opportunity rate
• Stretch only as a last resort, not as a policy

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Payment TermsNPV Method

• D Discount Rate
• DP Discount Period
• CP Credit Period
• K Investment Rate (ROI)
• If Klt(d/1-d)) (365/(CP DP))
• Then take the cash discount.

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Ethics and the Payment Decision
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Monitoring Accounts Payable

• Payables Turnover Ratio
• Total Purchases / Payables
  Balance
• Average Daily Purchases
• Total Purchases / Days in
  Period
• Days Payable Outstanding (DPO)
• Payables Balance/ Ave. Daily
  Purchases
• Balance Fraction Approach
• Monthly Payables
  Balance/Monthly Purchases

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Cash Disbursement Systems
Order Order Sale
Cash Placed Received
Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float
gt

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Paid
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Disbursement Policy 3 Principles

• Maximize value through payment timing
• Optimize the accuracy and timeliness of
  information
• Minimize balances in disbursement accounts

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Cash Flow Timeline
Disbursement Float
Mail Processing
Clearing Float
Float Float
Availability Slippage
Float
Bank debits payors accnt
Payee receives good funds
Payee deposits check at bank
Payee receives check
Payor puts check in the mail
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Disbursement System Considerations

• Centralization versus Decentralization
• Control and Fraud Prevention
• Disbursement Networks
• Compliance and Trade Terms
• Funding Disbursement Accounts
• Special Payment Types
• Bank Account Reconciliation

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Advantages of Centralization

• Reduction in bank and internal costs
• Minimize idle cash at local level
• Payment of bills can be scheduled to coordinate
  with the cash inflows of the firm.
• Easier and quicker access to companys cash
  position.
• Less likelihood of unauthorized disbursement.

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Advantages of Local Check Issuance on a
Centralized Disbursement Bank

• Satellite Locations
• Reduced number of banking relationships relative
  to decentralization.
• More opportunities for volume discounts at
  disbursement bank relative to decentralization.

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Advantages of Local Check Writing (continued)

• Greater autonomy for local managers relative to
  centralization.
• Local control of payment timing compared to
  centralization.
• Improved vendor relationships relative to
  centralization.

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Control and Fraud Prevention

• Separation of the functional authority for
  collection and disbursement.
• Segregation of expense approval, check signing,
  and reconciliation.
• Use of check stock printed on safety paper.
• Storing checks and signature plates in a secure
  area.

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Control and Fraud Prevention (continued)

• Using a printing process that does not require a
  preprinted check stock.
• Use of positive pay and reverse positive pay.
• Setting a specific dollar amount limit for each
  type of account.
• Increased use of electronic payment methods.

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Organizational Structure

• Functional areas impacting disbursements
• Treasury department
• Accounts payable department
• Production
• Purchasing department
• Personnel department
• Accounting and Bank Reconciliation

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Disbursement Systems

• Simple
• Complex systems

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Simple Systems

• Manual and paper-based
• Demand deposit accounts
• Payroll services
• Drafts
• Account reconciliation

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Complex Systems

• Paper-based systems
• Electronic disbursing systems
• Electronic data interchange

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Disbursement Products and Methods

• Zero Balance Accounts (ZBA)
• Controlled Disbursement
• Imprest Accounts
• Electronic Disbursement Methods
• Procurement Cards

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ZBAs

• Disbursement checks are written against the
  account.
• ZBA is funded from a master account at the same
  institution.
• Funding is automatic.
• Credits and debits to the master account and ZBA
  are done at the close of business.

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ZBA Benefits

• Allow different divisions and subsidiaries to
  write checks on separate accounts.
• Allows segregation of different types of payments
  by using different accounts.
• A cash manager can manage the master account and
  ZBAs as if they were a single account.
• Reduces idle balances.

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Controlled Disbursement

• Bank service providing same-day notification of
  dollar amount of checks that will clear against
  the controlled disbursement account.
• HDGS and-same-day presentment items complicate
  the management of controlled disbursement.

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Controlled Disbursement (continued)

• Errors in notification may arise from missed
  payments from the Fed, over-the-counter
  presentment of checks, and direct sends.
• Funding typically done through a concentration
  account.

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Selection of Controlled Disbursement Bank

• Timeliness of Reports
• Processing Accuracy
• Volume Capacity
• Reporting Detail and Reconciliation Services
• Price

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Imprest Accounts

• An account maintained at a prescribed level for a
  particular purpose.
• Account is periodically replenished to a
  prescribed level.

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A/P Developments

• Integrated or Comprehensive Payables
• Procurement Cards
• Imaging Services
• Internet Payments E-Checks

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Global Disbursing Systems

• System differences
• International disbursing risks
• Intra-company payments

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Optimizing the System

• Selecting the optimal disbursing mechanism
• Establishing a disbursement network
• Selection of the disbursement bank(s)
• Selection of the funding mechanism(s) for the
  disbursing accounts

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Summary

• Objective of a disbursement system pay with the
  right method, at the right time, in an efficient
  manner.
• Disbursement systems are simple and complex
• Simple systems tend to be paper based and use
  basic funding mechanisms
• Complex or sophisticated systems are prone to use
  electronic payments, controlled disbursement
  accounts and ZBAs with electronic funding of the
  accounts
• Disbursement systems should be well coordinated
  with cash collection and cash concentration
  systems