CASH MANAGEMENT IN BANK

Fund Management
? Balance Sheet Management
? Asset/ Liability Management

Sources of Banks Funds (Liability+Equity)
? Owners
? Deposits
? Borrowings
? Central Bank
? Inter Bank

Uses of Bank funds (Assets)
? Cash
? Investments
? Loans and advances
? Premises

Twin intents of fund management
? Maintain Liquidity
? Maximize total profitability

Liquidity Management
? CRR
? SLR
? Sufficient liquid assets to meet deposit outflows

Profitability Management
? To obtain funds at low cost
? To search for good borrowers/profitable loan/investing activities yielding high interest rates.
? To minimize default risk by constructing diversified loan and investment portfolio
? Spread and burden Management

Fund Management Considerations:
? Bank policies
? Capital adequacy reserve
? Credit deposit ratio
? Deposits and Loans
? Type
? Maturity
? Yield
? Loan Recovery


CASH MANAGEMENT STRATEGIES

The cash management strategies are essentially related to the cash turnover process.

Speeding Up Cash Receipts

Collections

• Expedite preparing and mailing the invoice
• Accelerate the mailing of payments from customers
• Reduce the time during which payments received by the firm remain uncollected

Collection Float: total time between the mailing of the check by the customer and the availability of cash to the receiving firm.

Mail Float: time the check is in the mail.

Processing Float: time it takes a company to process the check internally.

Availability Float: time consumed in clearing the check through the banking system.

Deposit Float: time during which the check received by the firm remains uncollected funds.

Earlier Billing:
Accelerate preparation and mailing of invoices
? computerized billing
? invoices included with shipment
? invoices are faxed
? advance payment requests
? preauthorized debits

Preauthorized Payments

Preauthorized debit
The transfer of funds from a payer’s bank account on a specified date to the payee’s bank account; the transfer is initiated by the payee with the payer’s advance authorization.

Lockbox Systems

Traditional Lockbox
A post office box maintained by a firm’s bank that is used as a receiving point for customer remittances.

Electronic Lockbox
A collection service provided by a firm’s bank that receives electronic payments and accompanying remittance data and communicates this information to the company in a specified format.

Advantage
Receive remittances sooner which reduces processing float.

Disadvantage
Cost of creating and maintaining a lockbox system. Generally, not advantageous for small remittances.
Concentration Banking
Cash Concentration
The movement of cash from lockbox or field banks into the firm’s central cash pool residing in a concentration bank.

Compensating Balance
Demand deposits maintained by a firm to compensate a bank for services provided, credit lines, or loans
Concentration Banking

Moving cash balances to a central location:
? Improves control over inflows and outflows of corporate cash.
? Reduces idle cash balances to a minimum.
? Allows for more effective investments by pooling excess cash balances.

Slowing Down Cash Payments

? “Playing the Float”
? Control of Disbursements
o Payable through Draft (PTD)
o Payroll and Dividend Disbursements
o Zero Balance Account (ZBA)
? Remote and Controlled Disbursing

“Playing the Float”
Net Float -- The dollar difference between the balance shown in a firm’s (or individual’s) checkbook balance and the balance on the bank’s books.
You write a check today, which is subtracted from your calculation of the account balance. The check has not cleared, which creates float. You can potentially earn interest on money that you have “spent.”

Control of Disbursements
Firms should be able to:
1. Shift funds quickly to banks from which disbursements are made.
2. Generate daily detailed information on balances, receipts, and disbursements.

Solution:
Centralize payables into a single (smaller number of) account(s). This provides better control of the disbursement process.

Payroll and Dividend Disbursements
The firm attempts to determine when payroll and dividend checks will be presented for collection.
• Many times a separate account is set up to handle each of these types of disbursements.
• A distribution scheduled is projected based on past experiences.
• Funds are deposited based on expected needs.
• Minimizes excessive cash balances.

Zero Balance Account (ZBA):A corporate checking account in which a zero balance is maintained. The account requires a master (parent) account from which funds are drawn to cover negative balances or to which excess balances are sent.

? Eliminates the need to accurately estimate each disbursement account.
? Only need to forecast overall cash needs.

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.
This maximizes disbursement float.

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.

Late check presentments are minimal, which allows more accurate predicting of disbursements on a day-to-day basis.