Cash Collection and Disbursement

Overview of Cash Collection and Disbursement
Cash collection and disbursement are important concepts in the present day business world. These processes have to be done properly so that a company can run its operations without much difficulty and maintain some stability.

Concept of Float
In the context of cash collection and disbursement float is an important concept. It could be explained as the difference in value between the company balance that has been entered into the ledger book and the balance of the company in its bank accounts.

There are basically two kinds of float – the disbursement float and the collection float. These two are different in terms of modes of transaction. The disbursement float results when a company provides a check. The collection float takes place when the company gets a check.

Concept of Net Float
Net float has been defined as the total of the collection float and the disbursement float. However, it could be described as the difference in value of the bank balance of the company and the ledger balance of the company.
With regards to cash collection and disbursement the financial managers always try to make the most of the net float. There are certain ways in which the maximum possible advantage could be derived from the net floats:
By delaying the disbursal of cash
By increasing the speed at which cash is collected


Increasing the Speed of Collection of Cash

The companies normally receive their payments in the forms of checks and the checks normally come by e-mail. This may be a time consuming process. That is why the companies want faster cash collection processes.

There are various ways in which the rate of cash collection could be increased. However, the two most important ways are:
Concentration Banking
Lock Boxes
Delaying the Outlays
There are several ways in which the companies can delay their payments:
The companies should make the payments at the due dates
The companies should try to tally the dates of their payment and the dates of cash receipts
The companies should centralize their disbursals

 

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Last Updated on : 27th June 2013

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