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Unit 6: Managing Collection and Disbursement of Working Capital

reduced to 2 days or less using the facilities of the direct interbank clearing. In the matter of Notes
cheque clearing, the banks are the experts, and firms usually can rely on their banks to minimise
the time requirements. Time norms for outstation collections (clearing is basically a local
phenomenon) have been laid down by RBI, ranging from ten days from metro-to-metro
collections, to about 3 weeks in case of remote branches in the interior. Banks not staying within
these parameters are likely to face RBI censure, or adverse comments from auditors.

Self Assessment

State whether the following statements are true or false:

1. The firm itself can control some factors that determine the various lags, but some it
cannot.
2. The funds transferred to the concentration account are available for disbursements and for
other purposes.
3. By transferring clerical functions to the bank, the firm may reduce its costs, improve
internal control, and reduce the possibility of fraud.

6.2 Controlling Disbursements

Just as speeding up collections turns accounts receivable into cash as soon as possible, thereby
reducing the firm’s financing requirements, slowing disbursements also has the same effect.
There, we concluded that the proper policy was to pay within the terms agreed upon, and taking
cash discounts when offered. We also concluded that there is no point in paying sooner than
agreed. By waiting as long as possible, the firm maximises the extent to which accounts payable
are used as a source of funds, a source which requires no interest payment.

Firms with expense-generating activities over a wide area often find it advantageous to make
disbursements from a single central account. In that way, schedules can be tightly controlled and
disbursements can be made on exactly the right day. An alternate arrangement is to disburse
from decentralised locations, but to wire transfer the exact amount needed in each local account
for all disbursements scheduled that day needs to be ascertained accurately by the Finance
Department at the Head Office.
Some firms find it advantageous to exploit the “cheque book float”, which is the time between
the writing of a cheque and its presentation for collection, represented by CD in Figure 6.2. If
this lag can be exploited, it offsets at least partially the lag in the other direction in collecting
cheques from customers (HI). Because of lag CD, a firm’s balance on the bank’s books is higher
than in its own cheque book. Knowing this, a firm may be able to reduce its working cash
requirements. Banks understand cheque book float also, and can be expected to set compensating
balances and fees based on balances on their (the banks) books. If a firm exploits cheque book
float too far, it increases the likelihood of cheques being dishonoured for insufficient funds and
the accompanying displeasure of both bank and payee.

6.2.1 Determining the Appropriate Working Cash Balance

Let us assume the firm is now collecting, and disbursing its cash as efficiently as possible. Given
its long-term financial structure and fixed assets, its total cash position at any time is determined
by its operating plan. If a firm’s total cash is more than what it needs for operating purposes, it
would be faced with a surplus working capital position. The Neptune Company projected a total
cash balance as high as ` 4,89,000 in November. Should all these funds be kept in Neptune’s
current account?

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