Page 128 - Accounting Best Practices

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6–6 Implement Controlled Disbursements
automatically clear out the excess funds in an account every day, forwarding the
money to a single account for each bank. Most banks will not automatically for-
ward money to an account at a different bank, so the money tends to stop at an
account within the geographical region covered by the bank. This still reduces the
number of accounts sufficiently to make it much easier for the cash management
staff to determine the amount of cash available. To avoid the problem of not
being able to automatically transfer cash between banks, some companies are
transferring all of their business to those large banks that have established a
national presence, so that a complete automatic centralization of all funds can be
achieved, no matter where in the country an account may be located. To make
this concept work properly, it is necessary to set up all outlying bank accounts as
lockboxes, only meant to receive cash (see the ‘‘Collect Receivables through
Lockboxes” section earlier in this chapter), with all disbursements coming out of
a single, centralized account, to which funds are only doled out as needed. By
using this approach, a cash management staff can eliminate the majority of its
clerical work.
An area-concentration banking system is an excellent way to efficiently con-
solidate a company’s cash holdings, but there are some problems with it. One is
that it may require the complete revision of the existing banking system, no
longer using a number of smaller banks that may not offer this service in favor of
a single national bank that does. In addition, as the bank will charge a fee for
each cash transfer, there must be a minimum volume of cash moving through the
system each day to make this arrangement a cost-effective one. Finally, this
method assumes that disbursements are from one location, so that no extra funds
must be distributed to outlying bank accounts that are needed to cover outstand-
ing checks. It can sometimes be quite difficult to revise the existing system of
bank accounts, especially due to the pressure by local managers who want to
retain their existing accounts, in order for the company to establish the most effi-
cient area-concentration banking layout.
Though the attainment of an area-concentration banking system may require
a significant amount of time, it is a best practice of particular help to those com-
panies with a national presence, a multitude of bank accounts, and a significant
amount of cash flow.
Cost: Installation time:

6–6 IMPLEMENT CONTROLLED DISBURSEMENTS

The person who is in charge of managing corporate cash flows is always trying
to find ways to retain cash legitimately for as long as possible, to invest it,
thereby earning interest for a company. There are unethical ways of doing so,
such as not paying suppliers even when previously agreed-upon pay dates have