Custom Search

CONTROLLING DISBURSEMENTS

Speeding up collections is not the only way to increase the net float. You can also do this by slowing down disbursements. One tempting strategy is to increase mail time. For example, United Carbon could pay its New York suppliers with checks mailed from Nome, Alaska, and its Los Angeles suppliers with checks mailed from Vienna, Maine. But on second thought you will realize that these kinds of post office tricks are unlikely to help you. Suppose you have promised to pay a New York supplier on March 29. Does it matter whether you mail the check from Alaska on the 26th or from New York on the 28th? Such mailing games would buy you time only if your creditor cares more about the date you mailed the check than the day it arrives. This is unlikely: with the notable exception of tax returns sent to the IRS, mailing dates are irrelevant. Of course you could use a remote mailing address as an excuse to pay late, but that`s a trick easily seen through. If you have to pay late, you may as well mail late.

Remote Disbursement. There are effective ways of increasing payment float, however. For example, suppose that United Carbon pays its suppliers with checks written on a New York City bank. From the time that the check is deposited by the supplier, there will be an average lapse of little more than a day before it is presented to United Carbon`s bank for payment. The alternative is for United Carbon to pay its suppliers

with checks mailed to arrive on time, but written on a bank in Helena, Montana; Midland, Texas; or Wilmington, Delaware. In these cases, it may take 3 or 4 days before each check is presented for payment. United Carbon thus gains several days of additional float. Some firms even maintain disbursement accounts in different parts of the country. The computer looks up each supplier`s zip code and automatically produces a

check on the most distant bank.

The suppliers won`t object to these machinations because the Federal Reserve guarantees a maximum clearing time of 2 days on all checks cleared through the Federal Reserve system. Therefore, the supplier never gives up more than 2 days of float. Instead, the victim of remote disbursement is the Federal Reserve, which loses float if it takes more than 2 days to collect funds. The Fed has been trying to prevent remote disbursement.

Zero-Balance Accounts. A New York City bank receives several check deliveries each day. Thus if United Carbon uses a New York City bank for paying its suppliers, it will not know at the beginning of the day how many checks will be presented for payment. Either it must keep a large cash balance to cover contingencies, or it must be prepared to borrow.

However, instead of having a disbursement account with, say, Morgan Guaranty Trust in New York, United Carbon could open a zero-balance account with Morgan`s affiliated bank in Wilmington, Delaware. Because it is not in a major banking center, this affiliated bank receives almost all check deliveries in the form of a single, earlymorning delivery from the Federal Reserve. Therefore, it can let the cash manager at United Carbon know early in the day exactly how much money will be paid out that day.

The cash manager then arranges for this sum to be transferred from the company`s concentration account to the disbursement account. Thus by the end of the day (and at the start of the next day), United Carbon has a zero balance in the disbursement account. United Carbon`s Wilmington account has two advantages. First, by choosing a remote location, the company has gained several days of float. Second, because the bank can forecast early in the day how much money will be paid out, United Carbon does not need to keep extra cash in the account to cover contingencies.

ZERO-BALANCE ACCOUNT Regional bank account to which just enough funds are transferred daily to pay each day`s bills.