Introduction to Corporate Finance

with a discussion of cash management that focuses

on float in the cash collection and payment system

and on the principles of managing the company’s

cash position. Next, we consider cash collection,

placing emphasis on the types of collection

systems, lockbox systems, cash concentration and

various mechanisms for funds transfer. Then we

review some key aspects of accounts payable and

disbursements: the accounts payable process, cash

discounts, disbursement products and methods,

and developments in accounts payable and

disbursements. Finally, we consider the company’s

use of short-term investing and borrowing to

maintain adequate liquidity.

19 -1 CASH MANAGEMENT

Many companies employ financial specialists known as cash managers. One of their primary roles is to

manage the cash flow time line related to collection, concentration and disbursement of the company’s

funds. The cash manager’s job typically starts when a customer (the payer) initiates payment to the

company (the payee) in any format (cash, cheque or electronic). Historically, most business-to-business

payments were made by sending a cheque in the mail, so collection processes tried to reduce delays

in mail, processing and cheque collection. As we shall see, with greater use of electronic clearances of

payments, the speed of collections has increased. Cash management still, however, matters.

The cash manager is also responsible for assembling or concentrating cash from remote collection

points into a central account and for initiating payments from the company to its suppliers. The final

stage of this process usually involves reconciling the company’s various bank accounts and managing all

the banking relationships. Any delay in timing on either the collection or disbursement side is generally

referred to as float.

19 -1a FLOAT

Float refers to funds that have been sent by the payer but are not yet usable funds to the payee. Float

is important in the cash conversion cycle, because its presence increases both the company’s average

collection period and its average payment period. The primary role of the cash manager on the collections

side is to minimise collection float wherever possible. On the payments side, trying to maximise

disbursement float is a common practice that raises an important question: is it ethical to intentionally

pay a supplier after the term within which the company agreed to pay? This topic will be discussed in

greater detail later in the chapter.

We can view float from either the receiving party’s (the payee’s) perspective or the paying party’s (the

payer’s) perspective. The following list points out that mail float and processing float are generally the

same from both perspectives, though the final outcomes are different. The four components of float are

defined as follows:

1 Mail float is the time delay between when payment is placed in the mail and when payment is received.

2 Processing float is the time between receipt of the payment and its deposit into the company’s account.

3 Availability float is the time between deposit of the cheque and availability of the funds to the company.

cash manager

A financial specialist

responsible for managing the

cash flow time line related to

collection, concentration and

disbursement of the company’s

funds

LO19.1

float

Funds that have been sent

by the payer but are not yet

usable funds to the payee

mail float

The time delay between when

payment is placed in the mail

and when payment is received

processing float

The time that elapses between

the receipt of a payment by a

company and its deposit into

the company’s account

availability float

The time between deposit of a

cheque and availability of the

funds to a company

19: Cash, Payables and Liquidity Management