Collection AND Disbursement Float PDF

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COLLECTION AND DISBURSEMENT FLOAT FLOAT -refers to funds that have been dispatched by a payer but are not yet in form that can be spent by the payee. -It also exists when a payee has receive funds in a spendable form but these funds have not been withdrawn from the account of the payer. -defined as "the difference between book cash and bank cash, representing the net effect of checks in the process of clearing." COMPONENTS OF FLOAT 1. Mail Float - the delay between the time when a payer mails a payment and the time when the payee receives it. 2. Processing Float- the delay between the receipt of a check by the payee and its deposit in the firm’s account. 3. Clearing Float- the delay between the deposit of a check by the payee and the actual availability of the funds. FLOAT TIME LINE

TYPES OF FLOAT 1. Collection Float- The delay between the time when a payer or customer deducts a payment from its checking account ledger and the time when the payee or vendor actually receives the funds in a spendable form.

2. Disbursement Float - the lapse between the time when a firm deducts a payment from its checking account ledger (disburses it) and the time when funds are actually withdrawn from its account.

SPEEDING UP COLLECTIONS Concentration Banking- a collection procedure in which payments are made to regionally dispersed collection centers, then deposited in local banks for quick clearing. Reduces collection float by shortening the mail and clearing float components. Lockbox System- a collection procedure in which payers send their payments to a nearby post office box that is emptied by the firm’s bank several times daily; the bank deposits the payment checks in the firm’s account. Reduces collection float by shortening processing float as well as mail and clearing float.

Direct Send- a collection procedure in which the payee presents checks for payment directly to the banks on which they are drawn, thus reducing clearing float. OTHER TECHNIQUES Preauthorized Check (PAC) -a check written by the payee against a customer’s checking account for a previously agreed upon amount. Because of prior legal authorization, the check does not require the customer’s signature. Depository Transfer Check (DTC)- an unsigned check drawn on one of the firm’s bank accounts and deposited into its account at a concentration or major disbursement bank, thereby speeding up the transfer of funds. Wire Transfers- telegraphic communications that, via bookkeeping entries, remove funds from the payer’s bank and deposit them into the payee’s bank, thereby reducing collection float. ACH (automated clearinghouse) debits- preauthorized electronic withdrawals from the payer’s account that are then transferred to the payee’s account via a settlement among banks by the automated clearinghouse. They clear in 1 day, thereby reducing mail, processing, and clearing float SLOWING DOWN DISBURESMENT Controlled Disbursing- The strategic use of mailing points and bank accounts to lengthen mail float and clearing float, respectively. Playing the float- A method of consciously anticipating the resulting float, or delay, associated with the payment process and using it to keep funds in an interest-earning form for as long as possible. Staggered Funding- A way to play the float by depositing a certain proportion of a payroll or payment into the firm’s checking account on several successive days following the actual issuance of a group of checks. Payable-through draf- A draf drawn on the payer’s checking account, payable to a given payee but not payable on demand; approval of the draf by the payer is required before the banks pays the draf.

OVER DRAFT,ZERO-BALANCE,AND ACH CREDITS Overdraf System- Automatic coverage by the bank of all checks presented against the firm’s account, regardless of the account balance. Zero-balance account- A checking account in which a zero balance is maintained and the firm is required to deposit funds to cover checks drawn on the account only as they are presented for payment. ACH (automated clearinghouse)credits- Deposits of payroll directly into the payee’s (employees) accounts. Sacrifices disbursement float but may generate goodwill for the employer....