Cash Concentration

1
Cash Concentration

• Chapter 7

2
Strategize

• The objectives of a cash concentration system
• Factors impacting cash concentration system
  configuration
• The advantages and disadvantages of funds
  transfer mechanisms used in cash concentration
  systems

3
Strategize

• The major cash concentration system costs and the
  methods to reduce costs
• The risk and control issues associated with cash
  concentration systems
• Learn how to calculate the following
• The value of funds acceleration
• The determination of the minimum breakeven
  wire transfer amount

4
Key Issue

• How do my customers pay me?

5
Describe 1

• Describe four characteristics of an
  over-the-counter/field banking system.
• 1. Multiple collection points
• 2. Multiple banks
• 3. Limited provision of cash management services
• 4. Deposit availability

6
Describe 2

• Describe five characteristics of a lockbox
  system.
• 1. Limited collection points
• 2. Use of regional money center banks and third
  party processors
• 3. Provision of cash management services
• 4. Deposit availability
• 5. Electronic Lockbox

7
Key Issue

• What are my options for pooling funds regardless
  of how my customers pay me?

8
Describe 3

• Describe the two most frequently used mechanisms
  for concentration.

1. Electronic Depository Transfer (EDT) 2. Wire
Transfer
9
Describe 4

• Describe three methods of notifying the
  concentration bank of deposit information.

1. Through a third-party vendor 2. Through
headquarters 3. Through the concentration bank
directly
10
Key Issue

• What can I do to concentrate more effectively?

11
Describe 5

• Describe four techniques used to improve transfer
  timing.
• 1. Remove information delays
• Establish cutoff times
• Require timely reports
• 2. Anticipate availability
• 3. Anticipating deposits
• 4. Use faster payment mechanism

12
Describe 6 (1 of 2)

• Describe four ways of reducing transfer costs.
• 1. Transfer timing
• End daily transfers
• Match timing of receipt with timing of transfer
• Balance averaging
• 2. Transfer mechanisms
• EDT vs. wire transfer
• Repetitive wire transfer
• 3. Deposit reconciliation services
• 4. Target and Threshold Concentration

13
Describe 7

• Target and Threshold concentration

• Target Funds above a pre- determined level
  are transferred

• Threshold Funds accumulate to a
  pre-determined level, and are then
  transferred

14
Comparing Transfer Costs (1)

• In determining whether to use an EDT or a wire
  transfer to concentrate funds, it is important
  to establish the value of the funds acceleration.
  
• By comparing this value to the costs of the
  alternative transfer methods, the appropriate
  transfer mechanism can be selected

15
Comparing Transfer Costs (1)

• Example
• Assume the following based on the fact that a
  wire transfer accelerates funds one day faster
  than an EDT
• EDT cost
  1.50
• Total wire transfer cost
  15.00
• Funds available for transfer
  100,000
• Opportunity cost of funds
  6

16
Comparing Transfer Costs (1)

• Funds Value Available Funds
  x Days Accelerated
  x Opportunity Cost/365
• Funds Value 100,000 x 1 x (0.06/365)
• 100,000 x 1 x 0.0001643
• 100,000 x 0.0001643
• 16.43
• Because the funds value, 16.43, exceeds the
  incremental costs of a wire transfer (15.00 -
  1.50 13.50), it is more advantageous for the
  company to use a wire transfer rather than an EDT.

17
Minimum Wire Transfer Amount (2)

• Determining the minimum wire transfer amount
• Another approach in comparing transfer costs is
  to determine the minimum wire transfer required
  to break even.

18
Minimum Wire Transfer Amount (2)

• Using the information from the previous example
• EDT cost 1.50
• Total wire transfer cost 15.00
• Opportunity cost of funds 6
• What is the minimum amount that would justify
  using a wire transfer vs. an EDT?

19
Minimum Wire Transfer Amount (2)
82,166.77