CASH MANAGEMENT SYSTEM
The basic premix of sound cash management is to
ensure that cash inflows and outflows are effectively
controlled and utilized. The effectively controlled
cash flow, firms must implement adequate cash
management techniques. The cash management
system in any business organization receipts its
(a) Accelerating the receipts / accelerating inflow of
(b) Decelerating cash outflow
ACCELERATING INFLOW OF
•An important function of the cash management system is the
prompt collection of funds. This process involves speeding up
of the conversion of receipts into available funds.
•The difference between balance shown in the firm’s account
book and the balance in the bank’s book represents float.
The three kinds of delays or floats in the cash collection
process are ;
(i) Postal float
(iii) Bank float
METHODS OF ACCELERATING
The three methods of accelerating cash
(i) Concentration Banking
(iii)Pre-authorized Payment System
It is a system of decentralizing collections.
According to this system, a large number of collection centers
are established by the firm in different areas.
The firm opens its bank account in local bank in different areas,
where it has collection centers.
The collection centers are required to collect cheques from their
customers and deposit them in local bank account.
Instructions are given to the local collection centers to daily
transfer funds over a certain limit telegraphically to the bank at
the Head office.
Disbursements are made on the basis of daily reports from the
ADVANTAGES OF CONCENTRATION
It speeds up collection of payments, and firm
gets the use of the funds more quickly.
The float related to cash receipts is
Official bank cheques which are pre printed
can transfer funds in a less expensive way than
transferring funds between accounts.
Lock-boxes are post office boxes rented by the firm at
one or more locations near its customers.
A nearby bank collects payments made to that address
on behalf of the firm, deposits them and sends a record of
deposit to the collecting firm.
The firm’s local bank is given the authority to pick
remittance directly from the post office box and deposit the
cheques in the firm’s account.
Standing instructions are given to the local bank to
transfer funds to the Head office when they exceeds a
ADVANTAGES OF LOCK-BOX SYSTEM
Rapid conversion of receivables in to cash.
saves mailing time of customers.
Reduce cost associated with manual preparation of
saves company’s processing time.
provides early knowledge of dishonest cheques.
cheques are usually drawn on local bank; so it reduces
the availability float.
reduces uncertainties attached to the traditional
Pre-authorized Payment System
Financial transaction in which one person withdraws funds from
another person's bank account.
Formally, the person who directly draws the funds ("the
payee") instructs his or her bank to collect (i.e., debit) an amount
directly from another's ("the payer's") bank account designed
by the payer and pay those funds into a bank account designated
by the payee.
Before the payer's banker will allow the transaction to take
place, the payer must have advised the bank that he or she has
authorized the payee to directly draw the funds.
It is also called pre-authorized debit (PAD) or direct debit.
Advantages of pre-authorized payment system
For organization For customers
Improved Cash flow Cost saving
Greater control Time saving
Increased customer loyalty Improved Financial Management
and retention Secure
Resource saving Trusted method of payment