Cash Management

Managing Float

The term float is used in finance and economics to represent duplicate money in the banking system between when a deposit is made in the recipient's account and when the money is deducted from the sender's account. Float is also associated with the amount of currency available to trade – i.e., countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade. Float is most apparent in the delay between a written check and the funds to cover that check being deducted from the payer's account.

Once the recipient, or payee, deposits the check in the corresponding account, the bank immediately credits (increases) the payee's account, assuming that the payer's bank will ultimately send the funds to cover the check. Until the payer's bank sends the funds, the payer and the payee have the same money in their accounts. Once the payee's bank notifies the payer's bank of a pending check, the duplicate funds will be removed from the payer's account, and the checks will be considered to have cleared the bank. In check clearing, bank float and customer float are present.

Bank float is the time it takes to clear the funds, from the time they were deposited to the time they were credited to the depositing bank. Customer float is defined as the span of time between the deposit to the time the funds are released for use by the depositor. The difference between the bank float and the customer float is called negative float. Negative float is used by the bank as the overnight investable funds. Float can cause marginal changes in the money supply. Before electronic check clearing, bad weather or communication problems often caused the float to significantly increase, as the clearing of checks was delayed. Another aspect of float time is its use to defraud, commonly known as check kiting.

Float in Relation to Cash Management

Floating Cash In cash management, float can be utilized to use cash on hand for as long as possible.

When managing cash disbursements, a company should endeavor to increase the time in the disbursement cycle. In other words, it is appropriate to delay making payments until they come due to the use of available cash for as long as possible. Some methods include mailing checks far away from those waiting to receive payment, disbursing checks from a remote bank, or purchasing with credit cards. Methods such as these present a company with three types of float to take advantage of:

1. Mail Float: Time spent in the mail.
   
   
2. Clearance Float: Time spent trying to clear the bank.
   
   
3. Processing Float: Time required to process cash flow transactions.

Source: Boundless Finance, https://ftp.worldpossible.org/endless/eos-rachel/RACHEL/RACHEL/modules/en-boundless-static/www.boundless.com/finance/textbooks/boundless-finance-textbook/working-capital-management-18/cash-management-126/index.html
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Managing Collections

The cash receipts cycle requires a diligent collection process. A company must balance this need for quick cash collections with the needs and desires of its customers. For example, important customers to a firm's business should be treated carefully instead of customers who mean little or nothing to its future. Therefore, collection efforts must be customer-specific to be effective. Specific collection techniques include letters, telephone calls, faxes, emails, and legal action. An example of a collection letter follows:

Our records indicate that a balance of $4,650.30 is over 90 days past due. We have sent monthly statements and reminders several times, but we have yet to receive payment or explain why payment should not be made. Please review this matter immediately. I will call you in the next five days to arrange payment.

The overall collection process should be proactive and preventive.

For example, wherever possible, a company should try to collect payment immediately after products or services are delivered, i.e., receive payment in cash. This eliminates the need for invoicing and follow-up collection techniques. A firm should always require deposits from customers with a history of making late payments. It should use credit applications to weed out bad customers and include a clause in the credit application that states all collection costs are reimbursed by the customer on delinquent accounts.

Example Collection Letter: A sample collection settlement letter.

Lock Box Banking

Lockbox banking is a service offered to companies by commercial banks that simplifies the collection and processing of account receivables. In general, a lockbox is a Post Office box accessible by a bank. A company may set up a lockbox service with their bank to receive customers' payments.

The company's customers send their payments to the PO box, and the bank subsequently collects and processes these payments directly and deposits them into the company's account. Because the bank is making the collection, the funds that have been received are immediately deposited into the company's account without first being processed by the company's accounting system, thereby speeding up cash collection. Another benefit of the lockbox service is that a company can maintain special mailboxes in different locations nationwide. A customer then sends payment to the closest lockbox.

Managing Disbursements

Cash Disbursements Cash payments are vital to managing and maintaining a successful business.

How a company manages various disbursements and current assets can significantly impact its cash flows. Several problem areas to watch out for include payroll, purchasing, inventories, and insurance.

Payroll

Payroll is a hefty cash outflow that requires special attention. One obvious trend in payroll management is to implement a flexible workforce since the work flow fluctuates. Outsourcing and temporary workers are often part of a flexible workforce. However, a company must retain a full-time workforce for core activities. A firm can also increase payroll float times by simply distributing payroll checks after the point when banks will clear checks.

Purchasing

Flexible purchasing practices can help a company maintain and generate cash flow. For example, a company may consider renting certain items rather than purchasing them. A manager may ask, "Do we really need this item, and how often will we use it?" If practical, a firm can order items out of season when prices are low. Finally, a firm may consider using credit cards to make purchases since this will allow more time for payment.

Inventory

Inventories have several hidden costs that can drain cash flow. These costs include storage, insurance, spoilage, handling, taxes, and financing. A company should eliminate non-moving inventory immediately, and obsolete inventory should be removed. A firm may also find new ways of disposing of inventory. For example, it is better to sell inventory at cost than not at all. The overall objective is to maintain profitable inventory levels.

Insurance

A company should ensure that it does not overinsure the business. A firm should purchase insurance in group packages to obtain the lowest premiums. It should start by covering the largest risks first. It should then structure as high a deductible as is affordable. A company should avoid duplication and excessive insurance and shift certain costs, such as health insurance, to the employee through higher payroll deductions. Insurance should be used to cover risks that are material but occur infrequently.