Chapter 10 Cash Concentration

Order Placed

Order Received < Inventory >

Payment Sent Cash Received Accounts Collection < Receivable > < Float >

Sale

Time ==>
Accounts < Payable > Disbursement < Float >

Invoice Received

Payment Sent Cash Disbursed Copyright 2005 by Thomson Learning, Inc.

Learning Objectives

Understand the need for a cash concentration system. Formulate a cash transfer decision model. Understand the advantages and disadvantages of the different cash transfer tools.

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Basic Structure

Exhibit 10.1 Cash transfer tools Initiation of the transfer

System costs
Benefits of the system

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Exhibit 10.1
Central Concentration Bank Lockbox Regional Concentration Bank 1 Gathering Bank 1 Gathering Bank 2 Regional Concentration Bank 2 Gathering Bank 2 Gathering Bank n Wire or ACH

Lockbox

DTC or ACH

Gathering Bank n

Gathering Bank 1

Customers...

Customers...
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Cash Transfer Tools

Depository transfer checks ACH or EDT Wire transfer

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Initiation of the Transfer

Decentralized Centralized

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System Costs

Opportunity cost of idle balances Transfer costs Administrative costs

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Benefits of the System

Economies of scale Enhanced visibility and control of balances Dual balance possibilities

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The Cash Flow Timeline

T1 T2 T3 T4 T5 T6

Debit field bank account Balance available at the concentration bank Transfer initiated

Collected funds at the field bank

Deposit reported Original deposit at field bank
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Cash Transfer Scheduling

Complicating factors Objective: minimize transfer costs Transfer rules

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Complicating Factors

Minimum transfer balance

Set incremental cost = Days Saved x ((k - ecr(1-rr)) x TBAL Solve for TBAL TBAL = Incremental cost/DS x [k - ecr(1-rr)/365]

Fluctuating daily deposits

Deposits with different availabilities

Availability of deposits v.s. clearing of transfer instrument Weekends
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Objective: Minimize Transfer Costs

Subject To: adequate bank compensation TC = Fee + (k x (ACB - RCB)) Where: RCB = (SC - Fee)/ecr(1-rr)

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Transfer Rules

Daily transfer: transfer the daily deposit Managing about a target:

one-time transfer out to earn interest reduces the number of transfers

Anticipation: initiate transfer prior to deposit

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Summary
A collection system such as a lockbox necessitates the development of a concentration system. This chapter discussed the structure of a cash concentration system and identified the advantages and disadvantages. The chapter developed an objective function for the cash transfer scheduling problem. Three transfer scheduling rules were identified and discussed. The chapter concluded by comparing cash concentration characteristics.

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