Ques : Describe cash collection and disbursements ?

 Once the cash budget has been prepared and appropriate net cash flows established the

finance manager should ensure that there does not exist a significant deviation
between projected and actual cash flows. The finance manager should expedite cash
collection and control cash disbursement. There are two types of floats, which would
require the attention of finance managers.

1) Collection Float: Collection float refers to the gap between the times, payment is
made by the customer/debtor and the time when funds are available for use in the
company’s bank account. In simple words it is the amount tied up in cheques and
drafts that have been sent by the customers, but has not yet been converted into cash.
The reasons for this type of collection float are:

 The time taken in postal transmission
 The time taken to process cheques and drafts by the company, and
 The time taken by banks to clear the cheques.

a) Concentration Banking: When the customers of the company are spread over
wide geographical areas then instead of a single collection center the company
opens collection centers at the regional level. The customers are instructed to
remit payments to their specific regional centers. These regional centers will
open bank accounts with the branches of banks where it has collection potential.
These branches will telegraphically or electronically transfer the collected
amount to the Head Office bank account. This system accelerates cash inflows.

b) Lock Box System: In this system, the customers are advised to mail their
payments to a post office box hired by the firm for collection purposes near
their area. The payments are collected by local banks who are authorised to do
so. They credit the payments quickly and report the transaction to the head
office.

c) Zero Balance Account: In this type of account any excess cash is used to buy
marketable securities. Excess cash is the balance remaining after the cheques
presented against this account are cleared. In case of shortage of cash
marketable securities are sold to replenish cash.

d) Electronic Fund Transfer: Through electronic fund transfer the collection
float can be completely eliminated the other benefit of electronic fund transfer is
instant updation of accounts and reporting of balances as and when required
without any delay.

2) Payment Float: Cheques issued but not paid by the bank at any particular time is
called payment float. Companies can make use of payment float, by issuing cheques,
even if it means as per books of account an overdraft beyond permissible bank limits.
The company should be very careful in playing this float in view of stringent
provisions regarding the dishonoring of cheques, loss of reputation etc.