Page 255 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes Self Assessment

Fill in the blanks:
3. ………………... is the plan of receipts and payments of cash during the budget period.
4. To estimate the requirements of cash, ………………... statements and cash budgets are
required to be prepared.

11.3 Cash Management Control Aspects

We have already seen that the finance manager must control the levels of cash balance at various
points in the organization. This task assumes special importance on account of the fact that there
is generally a tendency amongst divisional managers to keep cash balance in excess of their
needs.

Notes The financial managers must devise a system whereby each division of an
organization retains enough cash to meet its day-to-day requirements without having
surplus balances on hand. For this, methods have to be employed to:
1. Speed up the mailing time of payments from customers,
2. Reduce the time of payments received by the firm remain uncollected and speed up
the movement funds to be disbursement banks.

Two very important methods to speed up collection process are:
1. Concentrating banking and
2. Lock-box system
1. Concentration banking: In concentration banking, the company establishes a number of
strategic collection centers in different regions instead of a single collection center at the
head office. This system reduces the period between the time a customer mails in his
remittances and the time when they become spend able funds with the company. Payments
received by the different collection centers are deposited with their respective local banks
which in turn, transfer all surplus funds to the concentration bank of the head office. The
concentration bank with which the company has its major bank account is generally
located at the headquarters. Concentration banking is one important and popular way of
reducing the size of the float.

2. Lock-box system: Another means to accelerate the flow of funds is a lock box system. With
concentration banking, remittances are received by a collection centre and deposited in
the bank after processing. The purpose of lock box system is to eliminate the time between
the receipt of remittances by the company and the deposit in the bank. A lock box
arrangement usually is on regional basis, which a company chooses according to its
billing patterns. Before determining the regions to be used, a feasibility study is made of
the possibility of cheques that would be deposited under alternative plans. In this regard,
operations research techniques have proved useful in the location of lock box sites. For
example, if a company divides the country into five zones on the basis of feasibility
studies, it might pick up New Delhi for the North, Bombay for the West, Calcutta for the
East, Madras for the South and Nagpur for the centre.

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