Collecting and disbursing: increasing cash management efficiency through the utilization of bank services.

Author:Modlin, Steve

    Cash management policies among local governments have continued to evolve over the past several decades. Cyclical changes among economies at every level, state tax and expenditure limitation policies, and elevating tax and fee service level costs have forced local governments to further examine cash collection and disbursement methods. In response to this cash efficiency demand, many local governments have actually employed a cash management policy. For professionally administered county governments, this is generally a staff responsibility inclusive of state laws and guidelines determining the scope of activity participation. Administrative officials responsible for cash management, especially undesignated funds, have the enormous challenge of reducing the time for receivables, or float time, in addition to sustaining timely disbursements. Among the many efforts to increase the amount of revenue needed for service distribution, local governments employ a variety of methods to increase cash flow. All of these factors have proven to have a deciding effect on the ability of a county government to have sufficient service level funding inclusive of a cash flow that covers fees for service activities.

    This article examines the cash management and mobilization practices of county governments in North and South Carolina. Very little research exists which has examined the utilization of multiple bank services as a means to improve efficiency in collections and disbursements for cash maintenance purposes. In addition, this study examines float elimination by determining the time saved through service utilization. The disparity of background and responsibilities of decision-making officials, bank size, and cash maintenance preferences all play a role in county government bank service preference.


    Effective cash management policies have several objectives including proper management of liquidity, continual efforts at accelerating collections, maximizing investment earnings, timely and accurate reporting, and strong banking relationships (Larson, 2004; Forbes, 1980). Contrary to previous findings, the variety of services offered to assist with idle cash reserves has become very advantageous for local governments. The timing of cash receipts, disbursements, and investments have all proven to be critical in rate of return and cash forecast analysis (Modlin and Stewart, 2012). Any disruptions within these processes can possibly reduce opportunities to build cash reserves.


    Generally, one of the primary goals behind an effective cash management policy is to increase the amount of time money can held by the local government unit in order to maximize earnings through investment opportunities (Bland, 1986). However, in an era of burgeoning debt service payments, external contract services, and numerous vendors, maintaining an adequate cash flow to cover payables is becoming increasingly critical. For this to occur, the transaction process time for receiving cash has to decrease in order to maximize the time for payable elimination and provide for increased investment opportunities. While most local governments, especially larger units, have done a respectable job of eliminating this transit time for receivables, or float time, banks are continually providing alternatives that can reduce both collection and disbursement time.

    Over time, the primary method for reducing float for collections or disbursements is through the use of electronic commerce. In most cases, wire transfers (usually Fedwire) are primarily used for large sum collections such as intergovernmental funding or large tax payments to local governments. This particular method can save approximately 2-3 days in remittance (Guild, 1981). Of course, the amount received through the wire transfer service should be enough to cover the fee for the service.

    In contrast to the wire service, governments can also use the Automated Clearinghouse System (ACH). The ACH primarily is used to receive smaller payments on a recurring basis, thus reducing float time and increasing the possibilities for interest earnings (Coe, 2007). Furthermore, the ACH is a much cheaper alternative compared to the wire transfer and can have as little as a 1 day availability time (Phoenix-Hecht, 2003). Over the past several years, a trend has developed with disbursements taking place through the use of the ACH due to frequency and cost. The traditional collection methods of payments via coin and currency, electronic transactions, as well as paper checks have to also be made available to citizens. Paper checks and in-person payment methods can reduce float time somewhat, but officials have to ensure rapid deposits due to risk assessment factors associated with these practices (Gauthier, 1994; Larson, 2004).

    Other collection services governments employ to combat infrequent timing issues are the lockbox or a zero balance account (ZBA). The lockbox is basically a post office box that allows payments for an extended period of time. Since the service is provided by the bank, one of the services is to retrieve the funds thus reducing check processing time for local government staff while providing a centrally located convenient area for customers to mail checks. In most cases, accounts receivable data are updated frequently (Larson, 2004). For a local government to assess whether a lockbox is cost-effective, it is important to know the average invoice amount, how much float reduction occurs as a result of the lockbox, and the daily interest rate (Coe, 2007). The ZBA provides governments the opportunity to take collections and segregate them into other accounts that governments use for vendors, payroll, and even investments (Larson, 2004). At the end of each day, ZBA accounts are brought to zero and distributed to other outstanding concentration accounts (Larson, 2004). As with the other services, it is important for units to continually monitor fees to determine if benefits exceed costs.

    The multi-task operations associated with cash management practices necessitates a multi-service level bank that can provide a range of services based on the various needs of the governmental unit. The solicitation of services usually begins with the Request for Proposal (RFP) issuance which is inclusive of the services required, the contract period as well as service compensation among other requirements (Coe, 2007). Tier I banks usually provide the most services as well as having a substantially larger asset base. However, it is not unusual for local governments to choose a bank with a lower tier for local employment purposes in addition to keeping the government account "within the area" (Modlin and Stewart, 2012).


    There have only been two notable studies which have examined local government collection and disbursement practices. Onwujuba and Lynch (2002) examined the cash management practices in Louisiana cities with populations that exceeded 1,000...

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