## Managing Cash Collection and Disbursements
### Objective
The finance manager should minimize the gap between projected and actual cash flows by making cash collection and disbursement efficient.
Two key goals:
1. Accelerate cash collections as much as possible.
2. Delay cash disbursements within a permissible time frame.
### Understanding 'Float'
Float is the time delay between a transaction and the actual movement of cash. When accelerating collections, the firm wants to reduce float.
| Type of Float | Meaning |
|---|---|
| Billing Float | Time between a sale and issuance of the invoice to the customer. |
| Mail Float | Time when a cheque is in transit (post, courier, messenger). |
| Cheque Processing Float | Time the seller takes to record, sort and deposit a cheque after receiving it. |
| Banking Processing Float | Time from cheque deposit to actual crediting of funds in the seller's account. |
### Methods to Reduce Float & Speed Up Collections
| Method | How it helps |
|---|---|
| Faster Invoicing | Issuing invoices quickly reduces billing float. |
| Reducing Mail Delays | Faster cheque collection reduces mail float. |
| Faster Cheque Processing | Immediate sorting & depositing reduces processing float. |
| Concentration Banking | Multiple regional collection centres reduce the time lag; funds are then swept to the company's main bank, improving liquidity. |
| Lock Box System | Customers send payments to a bank-managed post-office box; the bank collects, processes and deposits cheques directly, eliminating delays. Reduces cheque processing float but has operational costs. |
### Controlling (Delaying) Payments
| Strategy | Explanation |
|---|---|
| Paying on Due Date | Pay on time but not before the due date, preserving cash. |
| Using Drafts Instead of Cheques | Drafts take longer to clear, giving more time to manage cash. |
| Playing the Float | Time cheque issuance to expected encashment, holding only the necessary bank balance. |
| Delaying Outstation Payments | Mailing cheques increases float, letting the firm use funds longer. |
### Key contrast: Lock Box vs Concentration Banking
- Concentration Banking → firm sets up its own regional collection centres, then transfers to a central account.
- Lock Box System → the bank directly receives and processes customer cheques via a PO box (firm staff don't handle them at all).