Chapter 12 - Disbursements, Collections, and Concentration Flashcards
1
Q
Controlled Disbursement
A
Checks are presented early in the morning (same-day) so the company has a clear understanding of how much funding is required
2
Q
If a controlled disbursement account is held at a bank other than where cash is concentrated, is ACH an acceptable means of transferring funds?
(what may the bank require instead?)
A
While ACH funding can be negotiated, they will usually require an account at the same bank or via wire
The bank may require a balance equivalent to an average day’s clearing or line of credit
3
Q
What is the downside to using a controlled disbursement account?
A
Discrepancies and same-day presentment can cause funding amounts to be inaccurate
4
Q
Prefect Presentment
A
Discrepancies encountered in one day are carried forward to the next day
Minimizes variances caused in trying to set the cash position
5
Q
Imprest Account
A
Account maintained at a fixed amount for a particular purpose or activity
May be used as petty cash
6
Q
Can local regulation impact how DDAs are used and how cash is used?
A
Yes, regulations vary
Some banks will not pay interest on surplus cash held in DDAs
7
Q
What is one of the significant advantages that electronic disbursements provide?
A
Include remittance information with the B2B payments
8
Q
Two advantages of direct deposit via ACH
A
Cost-effective
Certainty of timing
9
Q
Does NACHA have a standard format for ACH tax payments?
A
Yes
tax payment (TXP) banking convention
10
Q
EFTPS
A
Electronic Federal Tax Payment System
11
Q
Standing Wires
A
Repetitive transfer instructions are established to move funds between two specified accounts automatically when previously determined criteria are met
Useful for concentrating funds
12
Q
All outsourcing decisions have what type of implications?
A
Tax implications
13
Q
Freight Payments
(outsourced disbursement service)
A
Specialists will pay freight bills, audit bills, and overcharges
Provide reports so company can decide what is most efficient
14
Q
Why do many small to medium sized companies outsource payroll?
A
It is more cost effective to do so
15
Q
Two Approaches to Integrated/Comprehensive Accounts Payable Outsourcing
A
- Send a date file to the FSP with list of payments to be made
- FSP maintains a database of a firm’s payees that includes detailed information
* Company sends limited information to the FSP for disbursements
16
Q
Can Integrated/Comprehensive Accounts Payable Outsourcing be involved in onboarding suppliers?
A
Yes
17
Q
Payment Factory
A
Single term used for a wide variety of operating structures aimed at centralizing a company’s disbursements
18
Q
Benefits of Payment Factories
(review)
A
- Greater control of disbursements
- Minimizes the number of bank accounts
- Reduces transaction fees
- More effective deployment of working capital
- Linked to multilateral or re-invoicing programs
- Pay On Behalf Of (POBO)
18
Q
Challenges with a collections factory
A
Need to ensure customers from a variety of areas can easily make payments
19
Q
Three Broad Elements for Fraud Protection Framework
A
Collaborating with partners
Adopting robust processes, controls, and audit trails
* Segregation of duties and individual limits
* Timely confirmation and reconciliation of transactions
* Each transaction has a clear audit trail that can be reviewed
Educating employees
20
Q
Payee Match Positive Pay
A
Additional layer of security for positive pay that ensure no changes have been made to the payee in an attempt to deter fraud
21
Q
Teller Positive Pay
A
Tellers are able to review in real-time if the check should be cashed/deposited
22
Q
Is it typical to setup accounts with a default status for positive pay?
A
Yes
Pay All or Return All
23
Q
Positive Pay vs. Reverse Positive Pay
A
Positive Pay: Bank receives file and sends exceptions
Reverse Positive Pay: Bank sends file to company to decision
24
Downside to using Reverse Positive Pay
Teller Positive Pay is not possible, so fraudulent checks could still be cashed
25
Fraudulent Endorsement
| (and positive pay downsides)
Check is stolen or intercepted and deposited by a third party
Usually not able to be caught by positive pay
Positive Pay cannot distinguish between the copies, so the first check presented would be able to be deposited
26
Do fraudulent endorsement checks have a longer period to return?
Yes, may be returned upon discovery based on agreed-upon limits with the bank
27
Holder in Due Course
Unique US issue stemming from US law regarding negotiable instruments
The company may still be liable to the company that held the fraudulent check if it was used for negotiation
28
Managing Disbursement Information – 3 Examples
Balance-Reporting Services
Account Reconciliation Program (ARP)
Check Images
29
Account Reconciliation Program (ARP) - Two Types
**Partial Reconciliation Program:** bank lists all items paid in numerical order or chronological order
**Full Reconciliation Program:** firm provides bank list of disbursements and bank reconciles; generally included as part of positive pay as the process is already being done
30
Stop Payment
Order to paying bank not to honor a specific payment that has not yet cleared
31
High-Order Prefix Sorting
Allows a firm with multiple business units to use a single bank account for all payments and still identify individual payments by unit
Uses a specific code as part of the check serial number
32
What is one way to help improve timeliness of positive pay decisions?
Implement imaging services
| (not photocopies as those are physical copies)
33
What is the difference in default decisioning between reverse positive pay and regular positive pay?
As the company must review and make the decision for reverse positive pay, all of the checks presented, not just those with exceptions, would be returned if not completed in time
34
Major Issues to Address for Collections
| (review)
Speed of Collection
Security of the payment
Availability of remittance information
Customer preference
Cost of collection
35
Smart Safe / Virtual Vault
Cash can be deposited and provisional credit is granted until funds are picked up by the armored carrier
Useful for firms with geographically dispersed locations and can allow the bank to service them
36
Cash Recycler Machine
Can collect and sort received cash for use in future transactions
37
RDC is limited to what types of products?
Checks denominated in USD
38
Check Conversion
Converts a check into an ACH debit
Less expensive than processing check
Can be converted at a variety of different points
Limited to consumer checks under $25K
39
Benefits to Imaging Technology
| (review)
Reduced overall processing costs
Reduced courier fees
Increased productivity
Improved accuracy
Automated updating of A/R
Improved response time to customer inquiries
Faster resolution of lockbox discrepancies
40
What was historically a problem with EFT transfers as it related to collections?
No remittance information
41
Float Neutral Terms
Adjusting terms of payment to make it as favorable as using the current method of paying by check
42
Merchant Services
Support and equipment to help support processing credit and debit cards
43
What purpose do terminal identification numbers (TIDs) have?
They can help to identify which terminal processed a specific transaction
44
PCI DSS Requirements
| (review)
Install and maintain a firewall configuration to protect cardholder data
Do not use vendor-supplied defaults for system passwords or other security parameters
Protect stored cardholder data
Encrypt transmission of cardholder data across open public networks
Use and regularly update antivirus software or programs
Develop and maintain secure systems and applications
Restrict access to cardholder data by business need to know
Assign a unique ID to each person with computer access
Restrict physical access to cardholder data
Track and monitor all access to network resources and cardholder data
Regularly test security system and processes
Maintain a policy that addresses information security for all personnel
45
Advantages and Disadvantages of In-House Processing Center for Collections
**Advantages**
Maintain control
Detailed remittance information is needed
**Disadvantages**
Create and maintain controls
Processing delays
Staffing during peak hours
46
RDC and improved scanning technology, along with an increased use of electronic payments has resulted in what as it relates to the in-house processing center for collections discussion?
Changed guidelines in terms of when it is appropriate to have in-house collections
47
Major Advantages of Lockbox
| (review)
Reduced mail and processing float
Improved access to remittance information
Reduced information float
Reduced risk and improved security (no longer received internally)
Improved control and record-keeping capabilities
Uninterrupted service
Scalability
Proper segregation of duties
Easier to establish DR plans, therefore greater reliability
Easier to scale
48
Three Types of Lockboxes
* Retail
* Wholesale
* Hybrid ("Wholetail")
**Retail Lockboxes:** machine-readable remittance documents that are generally standardized and are typically C2B (utilities, credit card payments)
**Wholesale Lockboxes:** typically for B2B where remittance information is not standardized or machine readable; high value but lower volume
**Hybrid (“Wholetail”) Lockboxes:** handle smaller volumes but machine-readable remittance documents combining both wholesale and retail lockboxes
49
Electronic Lockbox
Combines and presents remittance information from electronic payments
50
Three Factors that Impact the Opportunity Cost of Float for Collections
Dollar amount
Collection time
Opportunity cost (ST investing or borrowing rate)
51
Are lockboxes subject to fixed and variable fees?
Yes
52
In order to determine if a lockbox may be the appropriate solution, what will a firm generally ask to be performed?
A lockbox study
Will look at geographic concentration of customers and average delivery times
53
Consolidated Remittance Processing (CRP)
Step beyond electronic lockbox where all remittance information is put into a common format
54
Receivables Matching
Service offered by bank or third party to match a processed payment against open invoices, applies payment, and updates the A/R record
55
EBPP vs. EIPP Scope
EBPP = retail customers
EIPP = commercial customers
56
EBPP/EIPP – What does it do?
Bridges between collections and disbursements that enable the sending and receiving of electronic statements and remittances
Easier to link remittance data since it is controlled by the biller
57
Hierarchy of International Collection Methods for Seller for Risk
| (least to most risky)
1. Cash in Advance
2. Letter of Credit
3. Documentary Collection
4. Open Account
58
Do documentary collection letters outline recourse procedures in the event of nonacceptance or nonpayment?
Yes
59
Remitting Bank
| (Documentary Collection)
Bank of the exporter
Receives the collection documents from the exporter
60
Collecting / Presenting Bank
| (Documentary Collection)
Bank of the importer
Presents the documents to the importer and collects payment
61
Documents Against Payment (D/P)
| (Documentary Collection)
Sight draft that requires the collecting bank to receive full and final payment before releasing documents
62
Documents Against Acceptance (D/A)
| (Documentary Collection)
Time draft, which is a draft payable on a specified date in the future
63
What is the less common way that the exporter will be paid under documentary collection?
Remitting bank may forward a discounted portion of the funds with final collection on the due date
Requires pre-existing credit relationship with the remitting bank
64
What happens in a documentary collection scenario where there is nonperformance?
Seller may need to remarket goods or pay to have goods returned
May initiate nonperformance against the buyer using the collecting bank
65
Import vs. Export Letters of Credit
Import = buyer’s side of transaction
Export = seller’s side of transaction
66
Are most letters of credit revocable or irrevocable?
Irrevocable
67
What is the bank’s role in a letter of credit transaction?
| (what are they not reviewing?)
Examination of documents, not the underlying merchandise
68
In letter of credit scenario, the buyer usually pays for goods when?
Before actually receiving them
69
Letter of Credit Transaction Banks
**Issuing Bank** – importer’s bank that issues the L/C
**Advising Bank** – advises the exporter of an L/C in its favor
**Negotiating Bank** – examines the documents presented by the beneficiary and receives payment from the issuing bank
**Confirming Bank** – advising/negotiating bank may commit to making payment as additional security
70
How does a banker’s acceptance arise out of a letter of credit scenario?
If credit terms are given to the buyer and a time draft is used, the seller may receive payment sooner by discounting and turning it into a banker’s acceptance
71
Bank Payment Obligation (PBO)
Service provided by SWIFT that is similar to a letter of credit but the documents are not checked
Payment is triggered when the seller submits electronic data that matches previously submitted buyer data
72
When medium-term financing is provided for the export of capital goods, what may accompany a deferred payment letter of credit?
A term loan agreement that matures when payment can be received
73
Two Governing Rulesets for Letters of Credit
**International Chamber of Commerce (ICC)**
* Uniform Customs and Practice for Documentary Credits (UCP)
* UCP 600
**UCC Article 5**
* Does not cover standby letters of credit
74
What does UCC Article 5 cover?
Letters of credit
75
What is the equivalent governning rulset for UCC Article 5?
ICC UCP 600
76
Why are standby letters of credit used in the US instead of bank guarantees?
US banks are not allowed to issue guarantees
US banks are not allowed to guarantee the performance of another’s obligations
77
ISP98
Provides much clearer and easier to follow rules than UCP for standby letters of credit
78
URDG 758
Guidelines for demand guarantees
79
Surety Bonds
| (also list out the three involved parties)
Performance guarantee often used with the government
* Principal = contractor
* Obligee = government
* Surety Company = issuer of the bond
80
How do buyers mitigate the risk associated with letters of credit given the bank does not inspect the merchandise?
They will oftentimes negotiate an inspection requirement
81
How does a banker’s acceptance work?
One company signs an unconditional written order directing a bank to pay a certain sum of money on demand or at a definite time to another company
Stamped accepted by the bank, making it a banker’s acceptance
Bank agrees to pay the face value of the obligation if the buyer fails to make payment
Importer pays fees to set up the accepted time draft and the exporter has the option to receive discounted cash now or wait until maturity
82
Which provides cheaper financing on a short-term basis: short-term loan or banker’s acceptance?
Banker's Acceptance
83
When banker’s acceptances are sold in the secondary market, whose creditworthiness is the instrument attached to?
The bank, not the issuer’s
84
Two Components for BA Financing Costs
Discount rate
Commission
85
BA’s are often used in conjunction with which type of instrument?
Letters of credit requiring a time draft drawn on a bank
86
Most BA financing is accomplished how in the markets?
| (nominal spread over what?)
Sale of eligible BA's with maturity not exceeding 180 days and a nominal spread over US Treasury bills
87
BA Rates
Rates at which BA’s trade
88
Trade Acceptances
Drawn on and accepted by an importer
Used when letters of credit may not be required and credit risk is acceptable
May be sold at a discount, but market is not as large
Paying obligation is with the importer instead of the bank
89
Barter vs. Countertrade
Barter = intended to use goods for own use
Countertrade = exporter is receiving valuable goods for resale locally; used when firms do not have access to sufficient hard currencies; pricing and FX rates are established between trading partners
90
Trading Companies
Exporter sells products at a discount to an export trading company, which then resells the products internally
91
Which of the following is the LEAST important factor to a company that is selecting a lockbox bank?
A. Balance reporting capabilities
B. Proximity to the company
C. Location of customers making the largest check payments
D. Availability schedule offered
Answer is B
Proximity to the company is not relevant for lockbox decisions.
Balance reporting, remittance data availability, location of customers making the largest check payments, and the availability would all be important considerations
92
Do lockboxes result in better or worse audit trails?
Better audit rails because of segregation for typical A/R activities
93
A lockbox study will determine the most cost-effective collection system for a company on the basis of what?
The remittance data characteristics
Uses data from remittance envelopes and images of checks to obtain the location and geographic concentration
94
Fixed vs. Variable Costs for Lockboxes
**Fixed**
* Renting the post office box
* Sending remittance data to the company
* Providing balance reporting
* Account maintenance
**Variable**
* Per item charges
* Transmission of remittance data
95
Are costs potentially a disadvantage or advantage for using a lockbox?
Potentially a disadvantage
96
Electronic Lockbox Characteristics Review
1. What spurred creation of electronic lockboxes?
2. What does it do?
3. Is mail involved?
4. What similarities does it share with a traditional lockbox?
1. Increased volume of electronic remittance payments
2. Combines and presents remittance information from electronic payments
3. No mail is involved
4. Reporting features
97
Concentration Accounts are also known as what types of accounts?
Header accounts
98
Two Major Objectives of Cash Concentration
Efficiently move funds from deposit bank accounts to the designated concentration account
Attain visibility over the group cash position
99
What are two reasons to have more than one concentration account?
More than one currency
Regional concentrations of cash
100
Exchange controls result in what with relation to concentration practices?
Limitations in certain countries on what can be concentrated cross-border
101
Physical Pooling
Amounts from accounts are actually moved from one account to another
Similar to ZBAs, but cross-entity
Requires intercompany loans
102
Notional Pooling
Making balancing entries via virtual accounts
Bank provides an interest statement that reflects the net offset, similar to what would have been achieved if physical pooling was required
Requires cross-guarantees and credit facilities to support negative balances
103
Overall, is the current environment making notional pooling more or less favored?
Less favored as tax, accounting, and regulatory changes are making it more difficult to implement
104
Single Currency vs. Multi-Currency Applicability for Pooling
Physical Pooling = single currency
Notional Pooling = can support multiple currencies
105
Bank-Operated Virtual Account Structure
Single legal account pooling
One single header account with transfers between group entities recorded as internal ledger movements
Common in Nordic countries
106
Company-Operated Virtual Account Structure
Same legal setup as bank-operated, but company is responsible for its administration
Common with COBO and POBO scenarios
May be used with an in-house bank
107
Is a formal pooling arrangement required with virtual accounts?
No, but intercompany loans are still a component to consider
108
How do virtual accounts help a corporate treasury team with managing and monitoring cash balances?
It allows a group’s position to easily be monitored in one location
109
Sweeping
Transferring funds from outlying depository locations to a central account
110
What is one benefit of using the same bank to concentrate funds?
Internal transfers are much less expensive
111
RDC and smart safes have led to what trends in banking and concentration-related considerations?
Field bank accounts are decreasing in use
112
What is a downside with calculating the break-even point for EFT methods?
It is constantly changing and changing daily
Automated process, even using wires, may be most efficient rather than recalculating every day
113
What is one method using the SWIFT network that entities can use to concentrate funds cross-border?
Direct access to SWIFT and utilize an in-house bank
This is usually used for groups with a high volume of transactions, but less complex entities have been implementing in-house banks
114
What is the bank overlay structure of concentrating cash cross-border?
Using one primary global partner with branches in various countries that will be used for in-country concentration with local banks
115
When determining the float neutral terms that should be offered to a customer, a customer paying on day 10 with 1/10 net 30 terms would have what discount rate?
The calculated discount rate + 1%
116
Collection Letter
Document in a documentary collection process that specifies the exact procedures to be followed before shipping document are released to the importer
117
Who determines the instructions specified in a collection letter?
The exporter or seller
118
Bill of Exchange
A written order to a party requiring the party to make a specified payment to the signatory or to a named payee
119
The UCP 600 created what key rule?
Sets an absolute deadline of five banking days to review L/C documents and pay or decline a draw
120
What types of taxes are paid via EFTPS?
Corporate business
Corporate sales
Corporate excise
Federal taxes withheld by employers
121
What role will a confirming bank in a letter of credit take on?
The confirming bank will be the negotiating bank as well.
122
If a question is asking about retailers, remote locations, cash, and reducing float, it is likely talking about what?
A smart safe
123
Do smart safes reduce cash float?
Yes, because they can be provided a provisional credit
124
A comprehensive payables service has the potential to reduce which type of risk?
Disbursement control risks
