Inefficiencies in Collection Activities
November 28, 2008 – 6:34 amA principal reason that inefficiencies occur in treasury management is float, which is often defined as funds in the process of collection, disbursement, or other movement. Float exists in the United States largely because of our legislative history—the McFadden Act (1927) and the Glass-Steagall Act (1933) required the establishment of separate financial institutions in each state and each financial services industry.
McFadden and Glass-Steagall were effectively repealed in the 1990s by the Interstate Banking and Branching Efficiency Act (1994) and the Gramm-Leach-Bliley Act (1999). Nevertheless, the number of commercial banks is still in excess of 8,000. This requires the movement of physical checks between the payor and the payee, and the drawee and deposit banks, causing a delay in the receipt of “good,” or collected, funds by the depositor.
The Role of Paper
Despite efforts to convert remittances by check to electronic mechanisms, the United States is writing about 50 billion checks each year. Checks are the prevalent payment mechanism for several reasons:
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Payment convenience
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Evidence of the remittance and long-established in law
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Accepted by most businesses
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Float management for the remitter
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Low banking cost (although the all-in cost can be expensive)
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An efficient process
Other forms of collection float occur earlier in the timeline activities before the check enters the U.S. Postal System (USPS). These float components are often managed by business units, information technology, or accounts receivable, not by treasury. The focus of this chapter will be on the elements under the control of treasury—mail, processing, and availability float. Collections float may involve several days, and is composed of three components:
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Mail float. The time between the mailing of a check and the arrival at its destination
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Processing float. The time between the receipt of the check and its deposit in a financial institution
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Availability float. The time between the depositing of the check and the corporation’s access to “good” funds
Taken From : Essentials of Managing Corporate Cash
