An evaluation should be made of who the payees are and to what degree time limits may be stretched. Approaches to delay cash payments include:
. Centralize the payables operation so that debt may be paid at the most opportune time and so that the amount of disbursement float may be determined. Never pay vendors early.
. Establish zero balance accounts for all disbursing units. These accounts are in the same concentration bank. Checks are drawn against these accounts, with the balance in each account never exceeding $0. Divisional disbursing authority is maintained at the local management level. The benefits of zero balance accounts are enhanced control over cash payments, reduction in excess cash balances maintained in regional banks, and a possible increase in disbursing float. Under the zero balance account (ZBA) arrangement, the company only deposits funds into its payroll and payables checking accounts when it anticipates checks will clear. This strategy is aggressive.
Caution: Be on guard against overdrafts and service charges. In a ZBA arrangement, the bank automatically transfers money from a master (concentration) account as checks are presented against the payroll and payables accounts. Hence, payroll and payable accounts are retained at zero balances. Under ZBA, the you do not have to anticipate clearing times on each account.
. Use controlled disbursing in which checks are drawn against a bank that has the capability to inform the issuer early enough each day to allow funding in an exact amount the same day.
. Make partial payments and/or postdate checks.
. Request additional information about an invoice before paying it.
. Use payment drafts, where payment is not made on demand. Instead, the draft is presented for collection to the bank, which in turn goes to the issuer to accept it. A draft may be used to allow for inspection before payment. When approved, the company deposits the funds. Net result: Less of a checking balance is required.
Note: The use of drafts involves bank charges (e.g., fixed monthly fee) and the inconveniences of always having to formally approve the draft before paying it.
. Draw checks on remote banks (e.g., a New York company using a Texas bank).
. Mail from post offices with limited service or where mail has to go through numerous handling points.
Tip: If you use float properly, you can maintain higher bank balances than the actual lower book balances. For example, if you write checks averaging $200,000 each day and three days are needed for them to clear, you will have a $600,000 checking balance less than the bank’s records.
. Use remote mailing, that is, mailing checks from a location far removed from both the payee and drawee bank. A company having a centralized processing of accounts payable can install remote check printers in their plants and offices around the country. The central computer determines from which banks to draw the check and which check printer to use to maximize delay time.
. Use probability analysis to determine the expected date for checks to clear.
Suggestion: Have separate checking accounts (e.g., payroll, dividends) and monitor check clearing dates. Payroll checks are not all cashed on the payroll date, so funds can be deposited later to earn a return.
. Use a computer terminal to transfer funds between various bank accounts at opportune times.
. Use a charge account to lengthen the time between buying goods and paying for them.
. Stretch payments as long as there is no associated finance charge or impairment in credit. Prepare a priority list of who should get paid first and who should get paid last.
. Do not pay bills before they are due.
. Avoid making prepaid expenses. For example, if you are going to prepay insurance, do it for one year, not three years.
. Compensate others with non-cash consideration, such as stock or notes.
. Delay the frequency of payments to employees (e.g., expense account reimbursements, payrolls). Avoid giving employees cash advances, such as for travel and entertainment or loans. Have a monthly payroll rather than a weekly payroll. In recession, the employer may eliminate or delay payroll payments to employees. Employees may be asked to take furloughs (e.g., two weeks off without pay) or give up current pay to be paid at a later date (e.g., postponing one week’s pay to a later year or at retirement).
. Pay commissions on sales when the receivables are collected instead of when the sales are made.
. Mail payments late in the day or on Fridays.
. Engage in barter arrangements to avoid a cash payment.
However, barter transactions are reportable for tax purposes based on the fair market value of what has been exchanged.
Every two weeks the company issues checks that average $500,000 and take three days to clear. You want to find out how much money can be saved annually if the transfer of funds is delayed from an interest-bearing account that pays 0.0384 percent per day (annual rate of 14%) for those three days:
$500, 000 × (0.000384 × 3) = $576
The savings per year is $576 × 26 (yearly payrolls) = $14,976.
Have you read: Cash Management System: Acceleration of Cash Inflow