Introduction to Corporate Finance

19: Cash, Payables and Liquidity Management

4 What is the company’s objective with regard to collection float? What are the common types of

collection systems?

5 What are the benefits of using a lockbox system? How does it work? How can the company assess

the economics of a lockbox system?

6 Why do companies employ cash concentration techniques? What are some of the popular transfer

mechanisms used by companies to move funds from depository banks to their concentration

banks?

7 How can the cash manager model the benefits and costs of various funds transfer mechanisms to

assess their economics? How can this analysis be used to determine the minimum transfer amount?

CONCEPT REVIEW QUESTIONS 19-2

19-3 ACCOUNTS PAYABLE AND

DISBURSEMENTS

The final component of the cash conversion cycle is the average payment period (APP), which has two

parts: (1) the time from the purchase of raw materials until the company places the payment in the mail;

and (2) payment float time (disbursement float). The payment float is the time it takes after the company

places its payment in the mail until the supplier has withdrawn funds from the company’s account.

19-3a OVERVIEW OF THE ACCOUNTS PAYABLE PROCESS

Section 19-1 addressed issues related to payment float time. In this section, we discuss the management

of the time that elapses between the purchase of raw materials and mailing the payment to the supplier.

This activity is called accounts payable management.

Purpose of the Accounts Payable Function

The primary purpose of the accounts payable (A/P) function is to examine all incoming invoices and

determine the proper amount to be paid. As part of this process, the cash manager matches the invoice to

both the purchase order and the receiving information to ensure that the goods or services were ordered

by an authorised person, and that they were actually received. The accounts payable clerk may make

adjustments to the invoiced amount for price or quantity differences. Companies usually pay multiple

invoices with a single cheque. A company has the right to make full use of any credit period offered, but

intentionally delaying payments or increasing disbursement float is considered to be an unethical cash

management practice. Once payment has been authorised (sometimes referred to as ‘vouchering’), the

cash manager is often responsible for the actual payment itself, either managing the preparation and

mailing of cheques or initiating the electronic transfer of funds.

Types of Payment Systems

The other issue involved with managing disbursements is the choice of a centralised or decentralised

payables and payments system. In a centralised system, all invoices are sent to a central accounts

accounts payable

management

A short-term financing activity

that involves managing the

time that elapses between the

purchase of raw materials and

mailing the payment to the

supplier

LO19.4