Collections, Disbursements and Forecasting - 2018

Global Manufacturing Company (GMC) is an Ohio-based company specializing in electronic controls for automated manufacturing and assembly line machinery. GMCs products are used in a wide variety of industries, including: automotive, computers, consumer electronics and appliances. The company was founded by two electrical engineers, Frank Kilowatt and Larry Voltz and began operations in 1979, initially selling their products to smaller manufacturing machinery suppliers in the U.S. market.

GMC has expanded significantly in recent years and now sell a small portion of annual sales to companies in Canada, Mexico, and Europe. Due to the high level of demand for their products, they are able to price all of their sales in US Dollars and sales have been growing rapidly (about 25% per year).

Frank and Larry have hired a new cash manager, Judy Cash, and charged her with reviewing and redesigning their collections, disbursements and forecasting processes. Your assignment is to help her with this analysis and make some suggestions as to how to proceed.

GMC currently bills its customers on a monthly basis for all items sold and shipped in that month, on 30 day terms, with an average collection period (Days Receivables) of about 45 days. Over 90% of the domestic customers (about 85% of total revenues) pay by a check in the mail sent to the companys headquarters in Dayton, with the remainder using mostly wire transfers and a few ACH transactions. The international customers typically pay via an electronic transfer, but some will express deliver dollar-denominated drafts payable through foreign banks (these usually become collection items).

One of the biggest problems in the receivables area is the application of payments, i.e. figuring out what GMC got paid for. Most customers pay several invoices, including adjustments for invoice/shipping errors, with a single check and remittance advice. Compounding the problem is the fact that remittance advice formats range from barely readable copies of invoices with adjustment notes scribbled on them to detailed computer generated forms with specific adjustment codes listed next to payment amounts.

The U.S customers are spread out all over the country and grouped by region, with about 25% in the eastern region, 40% in the central region, and 35% in the western region. The accounts receivable department processes the incoming payments with an average processing time of 3 days from receipt of payment to deposit at the local bank. They also estimate that approximate mail times for the regions are as follows: 2 days for central, 3 days for eastern, and 4 days for western. GMCs bank generally gives the company availability of items from the central region in 1-2 days, while the other regions deposits average 2-3 days.

On the disbursements side, the accounts payable department processes incoming invoices within a couple of days of receiving them, paying each invoice by individual check a couple of days prior to the due date to ensure the suppliers get them in timely manner. A few of the larger suppliers are paid by wire transfer, at their request. Most of the companys suppliers give them 30 day net terms.

The company maintains several checking (demand deposit) accounts at its main bank for cash management purposes. One account is used for all deposited items, another for vendor disbursements as well as ones for payroll and petty cash. Money is transferred from the deposit account and credit line to the disbursement accounts as needed; with the vendor and payroll accounts funded as checks are written and the petty cash account maintained at a pre-determined target level.

At the present time, the only forecasting being done is internal to the A/R and A/P departments. The A/R staff tries to project incoming payments at the beginning of each month, based on invoices sent out the previous month. The A/P department projects its disbursements at the start of each week, based on invoices that are coming due. There is no coordination on these forecasts and the company continually finds itself with either major balances in non-earning checking accounts or short of funds and having to draw on its line of credit.

Your assignment is to discuss the following issues and make recommendations in a memo to Judy, the cash manager. In doing so, list as many issues or ideas you can come up with. You will receive points for any correct answer/suggestion, however to earn maximum points on each question you need to provide at least the number of correct responses equal to the number shown in parenthesis following the question.

1. What are the major problems the company has with its current collections process? (4)

2. What can they do to improve the collections process? (3)

3. What are the major problems with the companys disbursement process? (3)

4. What can be done to improve the disbursement process? (2)

5. What forecasting method would be best for the company to implement? (1)