There are some specific techniques of liquidity management and process for the speedy collection of receivable from customers and slowing disbursement. We discuss in the present section.
(1) Speedy Cash Collection
In managing cash efficiency, the cash inflow process can be accelerated through systematic Planning and refined techniques. There are two broad approaches to doing this. In the first place, the customers should be encouraged to pay as quickly as possible. Secondly, the payment from customers should be converted into cash without any delay.
(2) Rapid Payment by Customer
One way to ensure rapid payment by customers is prompt billing. What the customer has to pay, the period of payment, etc., should be notified accurately and in advance. The use of mechanical devices for billing along with the enclosure of a self-addressed return envelope will speed-up payment by the customer. Another, and more important, technique to encourage prompt payment by customers is the practice of offering trade discount. The availability of discount, as discussed earlier, implies considerable saving to the customers. In their anxiety to avail of the facilities, the customers would be eager to make payment early.
(3) Early Conversion of Payment in Cash
Once the customer makes the payment by writing a cheque in favors of the business concern, the collection will be expedited by prompt encashment of the cheque. It can be recalled that there is a long lag between the time a cheque is prepaid and mailed by the customer and the funds are included in the cash reservoir of the companies.
The early conversion of payment into cash, as a technique to the speed-up collection of accounts receivable, is done to reduce the time lag between the posting of the cheque by the customer and the realization of money by the concerns. The postal float, lethargy, and bank float are collectively referred to as deposit float. " The term deposit float id defined as the sum of cheques written by customers that are not yet usable by the firm. The collection of accounts receivable can be considerably accelerated, by reducing transit, processing and collection time. An important the cash management technique is reduction in deposit float
(4) Concentration Banking
In this system of decentralized collection of accounts receivables, large companies, which have a large number of branches at a different place, select some of these, which are strategically located as collection centers for receiving payment from customers. Under this
The arrangement, the customers are required to send their payments to the collection center covering the area in which they live and these are deposited in the local amount of the concerned collection center, after meeting local expenses. "A concentration bank is one with which the firm has a major account usually a disbursement account. Concentration banking is a system of decentralized billing and multiple collection points is a useful technique to expedite the collection of account receivables. It reduces the time needed in the collection process by reducing the mailing time.
"The mailing time is saved both in respect of sending the bill to the customers has as well as in the receipt of payment. Another advantage is that concentration permits the firm to 'store' its cash more efficiently.
(5) Lock-Box System
The lock-box system is like concentration banking in that the collection is decentralized and is done at the branch level. But they differ in one very important respect. While the customer sends the cheque, under the concentration banking arrangement, to the collection centers, he sends them to a post office box under the lock-box system. The lock-box system is important is the concentration Banking system. In other words, the processing time within the firm before depositing a cheque in the bank is eliminated.
The use of concentration banking and lock-box system accelerates the collection of receivables it in involves a cost. While in the case of the former, the cost is in terms of the maintenance of multiple collection centers compensation to the bank for services represent the cost associated with the latter. Thus, the lock-box system, as a method of collection of receivables, has a two-fold advantage:
(i) the bank performs the clerical task of handling the remittances prior to deposits, services which the bank may be able to perform at a lower cost; (ii) the process of collection through the banking system begins immediately upon the receipt of the cheque / remittance and does not have to wait until the firm completes its processing for internal accounting purposes.
(6) Slowing Disbursement
Apart from a speedy collection of accounts receivable, the operating cash requirement can be reduced by slow disbursements of Accounts payable. It may be recalled that a basic strategy of cash management is to delay payment as long as possible without impairing the credit rating / standing of the firm. In fact, slow disbursements represent a source of funds requiring no interest payments. There are several techniques to delay payment of accounts payable, namely;
(A) Avoidance of early payments; (B) Centralized disbursement; (C) float; and, (D) Accruals.
(A) Avoidance of Early Payments
One way to delay payments is to avoid early payments. According to the terms of credit, a firm is required to make a payment within a stipulated period. It entitles a firm to cash discounts. If, however, payments are delayed beyond the due date, the credit standing may be adversely affected so that the firms would find it difficult to secure trade credit later. Thus, a firm would be advised might not payment early i.e. before the due date.
(B) Centralized Disbursements
Another method to slow down disbursement is to have centralized disbursement. The head office should make all the payments from a centralized disbursement account. Such an arrangement would enable a firm to delay payments and conserve cash for several reasons. Firstly, It involves an increase in transit time. Secondly, the reason for the reduction in operating cash requirement is that since the firm has a centralized bank account, a relatively smaller total cash balance will be needed.
(C) Float
A very important technique of slow disbursement is the float. The term float refers to the amount of money tied up in cheques that have been written, but have yet to be collected and encased. Alternatively, float represents the difference between the bank balance and bank balance of cash of a firm. The difference between the as shown by the concerned record and the actual bank balance is due to transit and processing delays. There are three ways of float are as below:
(a) Paying from a distant bank.
(b) Cheque-encashment analysis and,
(c) Bank draft.
(D) Accruals
The potential tool for stretching accounts payable is accrual which is defined as current liabilities that represent a services or goods received by a concern but not yet paid for. The longer the period after which payments are made, 'the greater the amount of free financing and the smaller the amount of cash balance required.
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