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Page 197: $500,000 per what time period (at what frequency)? Similarly, how often how frequently, does the extra $5 million occur? Chapter 7 Current Asset
Page 197: $500,000 per what time period (at what frequency)? Similarly, how often how frequently, does the extra $5 million occur?
Chapter 7 Current Asset Management pattern more aptly describes the payment procedures. While the preceding example represents an extreme case, the slowing of disbursements is not uncommon in cash management. It has even been given the title extended disbursement float." Cost-Benefit Analysis An efficiently maintained cash management program can be an expensive operation. The use of remote collection and disbursement centers involves additional costs, and banks involved in the process will require that the firm maintain adequate deposit bal- ances or pay sufficient fees to justify the services. These expenses must be compared to the benefits that may accrue through the use of cost-benefit analysis. If a firm has an average daily remittance of $2 million and 1.5 days can be saved in the collection process by establishing a sophisticated collec- tion network, the firm has freed $3 million for investment elsewhere. Also, through stretching the disbursement schedule by one day, perhaps another $2 million will become available for other uses. An example of this process is shown in Figure 7-3. If the firm is able to earn 10 percent on the $5 million that is freed up, as much as $500,000 may be expended on the administrative costs of cash management before the new costs are equal to the generated revenue. Figure 7-3 Cash management network Collection Collection center center Collection center Collection center Collection center Regional banks Regional banks Regional banks Regional banks Regional banks Wire transfer Corporate bank Corporate headquarters Major banking center Reduce remittance time-1.5 days Increase disbursement time-1 day 2.5 days freed-up cash balance Non-Federal Reserve city bank 2.5 days freed-up cash balance X$2 million-average cash movement per day $5 million available funds Disbursement center Chapter 7 Current Asset Management pattern more aptly describes the payment procedures. While the preceding example represents an extreme case, the slowing of disbursements is not uncommon in cash management. It has even been given the title extended disbursement float." Cost-Benefit Analysis An efficiently maintained cash management program can be an expensive operation. The use of remote collection and disbursement centers involves additional costs, and banks involved in the process will require that the firm maintain adequate deposit bal- ances or pay sufficient fees to justify the services. These expenses must be compared to the benefits that may accrue through the use of cost-benefit analysis. If a firm has an average daily remittance of $2 million and 1.5 days can be saved in the collection process by establishing a sophisticated collec- tion network, the firm has freed $3 million for investment elsewhere. Also, through stretching the disbursement schedule by one day, perhaps another $2 million will become available for other uses. An example of this process is shown in Figure 7-3. If the firm is able to earn 10 percent on the $5 million that is freed up, as much as $500,000 may be expended on the administrative costs of cash management before the new costs are equal to the generated revenue. Figure 7-3 Cash management network Collection Collection center center Collection center Collection center Collection center Regional banks Regional banks Regional banks Regional banks Regional banks Wire transfer Corporate bank Corporate headquarters Major banking center Reduce remittance time-1.5 days Increase disbursement time-1 day 2.5 days freed-up cash balance Non-Federal Reserve city bank 2.5 days freed-up cash balance X$2 million-average cash movement per day $5 million available funds Disbursement centerStep by Step Solution
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