Controlling Cash Outflows

Controlling cash outflows. Just as the basic rule for increasing cash inflows is to increase collection speed, the basic rule for decreasing cash outflows is to slow down the payment process. For this, a centralized payment system may be adopted, just as a decentralized collection system was adopted in the case of receivables. A reasonable delay in paying the creditors helps to improve the cash balances, provided it does not hamper the firm’s credit rating. If such a procedure is adopted, the cash position is also improved and the goodwill is also retained.

Methods of Slowing Disbursement :

The following methods may be adopted to slow down the disbursements:

1) Mailing payments of Friday:

Mailing the payments on Friday, or the day followed by a holiday, or even late in the day will assist the company in maintaining higher balances than appear in the books.

2) Remote Disbursement:

When the cheques are drawn on any remote location and the same are mailed, it further increases the processing time due to the involvement of the higher processing time. This will further increase the float.

3) Zero Balance Accounts:

Zero balance accounts, i.e., accounts having no balance, are also maintained to curb payments. This account is also known as the controlled disbursement account. Under this, the cheque is issued by the company upon the purchases, and when they reach the bank for clearance, the account is funded by the master account of the company with the requisite amount. Thus, only that much is transferred that is required, and the disbursement is made. The company also earns interest on the surplus balance in the master account.

4) Centralisation of Accounts Payable:

Under this method, no separate accounts are maintained by the firm, and instead, only one centralized account is maintained. So, the company is also not required to maintain a minimum balance in separate accounts. In addition, this saving can be exercised as a result of better control over payments, reduction in costs and sometimes even getting rebates for early disbursements. This system also maximizes the payment floats as the payment is released at the most beneficial time.

5) Slowing the Bill-Pacing Function: ( Controlling cash outflows )

Checks should be imposed internally on the bills. They must not be automatically disbursed when they arrive for payment. Creditors can be prioritized for the payment function and those giving the maximum benefit should be paid first.

6) Paying through Draft:

The usage of drafts may further delay the payment. When a company issues drafts to its vendors, the same is remitted to the company’s banker who further seeks permission from the company to make the payment. If the company accepts the same, an amount equal to that of the draft is deposited/transferred to the account. Drafts are mostly used when the purchases require an inspection by the company before releasing the payment.

7) Paying by Charge Card: ( Controlling cash outflows )

Often the due date provided in the credit cards is utilized to the extent to avail the maximum benefit. When a bill comes for payment, the finance manager simply says “charge it”. Under this, the payment is made by Na using a credit card and upon the due date, the amount is actually remitted to the credit card account. In a way, the extra term of the credit card is used to the extent that there is a certain saving in the cost.

8) Avoidance of Early Payments:

The best possible way to avoid early payments is to delay the payments. If a firm honor its obligations timely, it may also be entitled to some cash discount. But, if the obligations are not discharged on time, it may adversely affect the credit rating and also the goodwill of the firm. As a consequence, later on, the firm will not be able to get trade credits. If, upon early payments no benefits are available, then strictly the firm should avoid doing so and the payments should only be made on the due date.

10) Paying the Float:

‘Float’ is the time gap between the time a cheque is issued and the same comes back to the bank account for clearance. There may be a situation when a firm issues a cheque of a higher amount than the available balance in the company’s account. It may take some days for the cheque to arrive for clearance and meanwhile, the deficiency can be fulfilled. This time lag can be utilized by the company in a productive manner by utilizing the funds elsewhere. A firm can definitely take advantage of the opportunity cost if the time lag is accurately managed by the finance manager.

Types of Risks Associated with ReceivablesClick here

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