Cash Concentration Systems

A cash concentration system is designed to move funds from many small accounts into one or several large master accounts as efficiently as possible. A cash concentration network improves the financial managerís control of company cash by accumulating balances in one large account. The manager may be able to forecast total cash flows for the master account with a smaller percentage error than that associated with estimating cash balances of many small accounts. In addition, the manager can invest these funds at higher rates, since pooled funds can buy larger blocks of investment securities or money market instruments that are sold in large denominations. Finally, the cash concentration network can help reduce both excess balances in many small banks and expenses for transferring funds. A concentration network uses DTCs (depository transfer check), wire transfers, and lockboxes to improve the efficiency of the firmís cash flows and investments. The type of system that a firm employs will depend upon the average dollar volume of its transactions, the number and sophistication of its banks, the timing and type of information that it requires, and the current opportunity cost of float. For example, DTCs are preferable to wire transfers when transferring funds in small dollar amounts through a volume of transactions, since DTCs are much less expensive than wire transfers. However, a high volume of transactions involving disbursements that are known ahead of time (such as payroll) might induce the firm to use an Automated Clearing House (ACH) transfer. ACH transfers often handle highvolume transactions and regular (or batch) transactions, and they usually can make the funds available in one business day. Although the ACH cannot provide the same immediate availability as wire transfer, it is slightly less expensive than a DTC and may serve a useful purpose when handling certain types of payments. Cash concentration systems are improving firmsí float management and information gathering. For example, ACH tapes now can be deposited on weekends to help reduce the firmís risk of overdrafts. Future cash concentration systems should continue to make strides in reducing excess balances, administrative costs, and transfer costs while providing the manager with more reliable information to help with investing cash and arranging appropriate lines of credit.