lecture 12_working capital and current assets management

7/25/2019 Lecture 12_Working Capital and Current Assets Management

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Lecture 12

Working Capital and Current Assets

Management

1CFEA 2123/2124 Financial Management


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2-2

Learning Goals

1. Understand working capital management, networking capital, and the related trade-off betweenprofitability and risk.

2. Describe the cash conversion cycle, its fundingrequirements, and the key strategies for managing it.

3. Discuss inventory management: differing views,common techniques, and international concerns.



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2-3

Learning Goals (cont.)

4. Explain the credit selection process and the quantitativeprocedure for evaluating changes in credit standards.

5. Review the procedures for quantitatively consideringcash discount changes, other aspects of credit terms, andcredit monitoring.

6. Understand the management of receipts anddisbursements, including float, speeding up collections,slowing down payments, cash concentration and zero-balance accounts.



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Working Capital Management

Working capital (or short-term financial) managementis the management of current assets and currentliabilities. Current assets include inventory, accounts receivable,

marketable securities, and cash.

Current liabilities include notes payable, accruals, andaccounts payable..

Firms are able to reduce financing costs or increase thefunds available for expansion by minimizing the amount offunds tied up in working capital.

CFEA 2123/2124 Financial Management 4


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Assets and Liabilities: Short Term & Long Term


Current Assets:

Cash

Marketable Securities

Accounts Receivable

Inventory

Current Liabilities:

Accounts Payable

Accruals

Short-Term Debt

Taxes Payable

Fixed Assets:

Investments

Plant & MachineryLand and Buildings

Long-Term Financing:

Long-term Debt

Equity


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Net Working Capital

Working capital refers to current assets, which

represent the portion of investment that

circulates from one form to another in the

ordinary conduct of business.

Net working capital is the difference betweenthe firms current assets and its current

liabilities; can be positive or negative.



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Trade-off between Profitability and Risk

Profitability is the relationship between revenues and costs

generated by using the firmsassetsboth current and fixed

in productive activities.

A firm can increase its profits by1. increasing revenues; or

2. decreasing costs.

Risk (of insolvency) is the probability that a firm will be

unable to pay its bills as they come due.

Insolventdescribes a firm that is unable to pay its bills as they

come due.CFEA 2123/2124 Financial Management 7


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Trade-off between Profitability & Risk (cont.)


Current

Assets

Net WorkingCapital > 0

Fixed

Assets

Current

Liabilities

Long-Term

Debt

Equity

lowreturn

high

return

low cost

high cost

highest

cost

PositiveNet Working Capital (low return and low risk)


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Current

Assets

Fixed

Assets

Current

Liabilities

Net WorkingCapital < 0

Long-TermDebt

Equity

low

return

highreturn

low cost

high cost

highest

cost

NegativeNet Working Capital (high return and high risk)


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Cash Conversion Cycle

Short-term financial managementmanaging currentassets and current liabilitiesis on of the financialmanagersmost important and time-consuming activities.

The goal of short-term financial management is tomanage each of the firms current assets and liabilitiesto achieve a balance between profitability and risk

that contributes positively to overall firm value.

Central to short-term financial management is anunderstanding of the firmscash conversion cycle.



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Cash Conversion Cycle (cont.)

The cash conversion cycle (CCC) is the length

of time required for a company to convert cash

invested in its operations to cash received as a

result of its operations.



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Calculating the Cash Conversion Cycle

A firmsoperating cycle (OC)is the time from thebeginning of the production process to collection ofcash from the sale of the finished product.

It is measured in elapsed time by summing theaverage age of inventory (AAI) and the averagecollection period (ACP).

OC = AAI + ACP



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Calculating the Cash Conversion Cycle (cont.)

Increasing speed lowers working capital

A firm can lowerits working capital if it can speed

up its operating cycle.

For example, if a firm accepts bank credit (like a

Visa card), it will receive cash sooner after the sale

is transacted than if it has to wait until the customerpays its accounts receivable.



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However, the process of producing and selling a productalso includes the purchase of production inputs (rawmaterials) on account, which results in accountspayable.

The time it takes to pay the accounts payable, measuredin days, is the average payment period (APP). Theoperating cycle less the average payment period

yields the cash conversion cycle. The formula for the cashconversion cycle is:

CCC = OC APP



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Substituting for OC, we can see that the cash

conversion cycle has three main components, as

shown in the following equation:

1. average age of the inventory

2. average collection period

3. average payment period.

CCC = AAI + ACP APP



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In 2007, International Business Machines Corp. (IBM) hadannual revenues of $98,786 million, cost of revenue of$57,057 million, and account payable of $8,054 million.

IBM had an average age of inventory (AAI) of 17.5 days,an average collection period (ACP) of 44.8 days, and anaverage payment period (APP) of 51.2 days (IBMspurchases were $57,416 million).

Thus the cash conversion cycle for IBM was 11.1 days(17.5 + 44.8 51.2)

CCC = AAI + ACP APPCFEA 2123/2124 Financial Management 17


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The resources IBM had invested in this CCC (assuming a 365-day year) were

With more than $6.8 billion committed to working capital, IBM

was surely motivated to make improvements.

Changes in any of the component cycles will change theresources tied up in IBMsoperation.


Inventory = $ 57,057 million X (17.5 365) = $ 2,735,609,589

+ Account receivable = 98,786 million X (44.8 365) = 12,124,966,575Accounts payable = 57,416 million X (51.2 365) = 8,053,970,411

= Resources invested = $ 6,806,605,753


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Timeline for IBMsCash Conversion Cycle


Note: Reducing AAI or ACP or lengthening APP will reduce the cash

conversion cycle, thus reducing the amount of resources the firm must commit

to support operations.


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Funding Requirements of the Cash

Conversion Cycle

A permanent funding requirement is a

constant investment in operating assets resulting

from constant sales over time.

A seasonal funding requirement is an

investment in operating assets that varies overtime as a result of cyclic sales.



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Funding Requirements of the Cash

Conversion Cycle (cont.)



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Aggressive vs. Conservative Seasonal

Funding Strategies

An aggressive funding strategy is a funding strategy

under which the firm funds its seasonal requirements

with short-term debt and its permanent requirements

with long-term debt.

A conservative funding strategy is a funding

strategy under which the firm funds both its seasonaland its permanent requirements with long-term debt.



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Funding Strategies (cont.)

Semper Pump Company has a permanent fundingrequirement of $135,000 in operating assets and seasonalfunding requirements that vary between $0 and $990,000and average $101,250. If Semper can borrow short-term

funds at 6.25% and long-term funds at 8%, and if it canearn 5% on the investment of any surplus balances, then theannual cost of an aggressive strategy for seasonal fundingwill be:


Cost of short-term financing = 0.0625 $101,250 = $ 6,328.13

+ Cost of long-term financing = 0.0800 135,000 = 10,800.00

Earnings on surplus balances = 0.0500 0 = 0

Total cost of aggressive strategy = $17,128.13


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Alternatively, Semper can choose a conservative strategy,under which surplus cash balances are fully invested. (InFigure 15.3, this surplus will be the difference between thepeak need of $1,125,000 and the total need, which varies

between $135,000 and $1,125,000 during the year.) Thecost of the conservative strategy will be:


Cost of short-term financing = 0.0625 $ 0 = $ 0

+ Cost of long-term financing = 0.0800 1,125,000 = 90,000.00

Earnings on surplus balances = 0.0500 888,750 = 44,437.50

Total cost of conservative strategy = $45,562.50


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Clearly, the aggressive strategysheavy reliance on short-term

financing makes it riskierthan the conservative strategy because

of interest rate swings and possible difficulties in obtaining

needed funds quickly when the seasonal peaks occur.

The conservative strategy avoids these risks through the locked-

in interest rate and long-term financing, but is more costly. Thusthe final decision is left to management.


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Strategies for Managing the Cash

Conversion Cycle

The goal is to minimize the length of the cash conversion cycle,which minimizes negotiated liabilities. This goal can be realizedthrough use of the following strategies:

1. Turn over inventory as quickly as possible without stockouts that resultin lost sales.

2. Collect accounts receivable as quickly as possible without losing salesfrom high-pressure collection techniques.

3. Manage mail, processing, and clearing time to reduce them whencollecting from customers and to increase them when paying suppliers.

4. Pay accounts payable as slowly as possible without damaging thefirmscredit rating.



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Inventory Management

Classification of inventories:

Raw materials: items purchased for use in themanufacture of a finished product

Work-in-progress: all items that are currently inproduction

Finished goods: items that have been producedbut not yet sold



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Inventory Management (cont.)

Differing viewpoints about appropriate inventory levelscommonly exist among a firms finance, marketing,manufacturing, and purchasing managers. The financial managers general disposition toward inventory

levels is to keep them low, to ensure that the firmsmoney is notbeing unwisely invested in excess resources.

The marketing manager, on the other hand, would like to havelarge inventories of the firmsfinished products.

The manufacturing managers major responsibility is toimplement the production plan so that it results in the desired

amount of finished goods of acceptable quality available on timeat a low cost.

The purchasing manager is concerned solely with the rawmaterials inventories.



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Common Techniques for Managing Inventory

Four commonly used techniques:

1. ABC System

2. Economic Order Quantity (EOQ) Model3. Just-in-Time (JIT) System

4. Computerized Systems for Resource Control



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ABC Inventory System

The ABC inventory system is an inventory managementtechnique that divides inventory into three groupsA, B,and C, in descending order of importance and level ofmonitoring, on the basis of the dollar investment in each.

The A group includes those items with the largest dollar investment.Typically, this group consists of 20 percent of the firmsinventoryitems but 80 percent of its investment in inventory.

The B group consists of items that account for the next largestinvestment in inventory.

The C group consists of a large number of items that require arelatively small investment.



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ABC Inventory System (cont.)

The inventory group of each item determines the itemslevelof monitoring.

The A group items receive the most intense monitoring because

of the high dollar investment. Typically, A group items aretracked on a perpetual inventory system that allows dailyverification of each itemsinventory level.

B group items are frequently controlled through periodic,perhaps weekly, checking of their levels.

C group items are monitored with unsophisticated techniques,such as the two-bin method; an unsophisticated inventory-monitoring technique that involves reordering inventory when oneof two bins is empty.



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ABC Inventory System (cont.)

The large dollar investment in A and B group

items suggests the need for a better method of

inventory management than the ABC system.



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Economic Order Quantity (EOQ) Model

The Economic Order Quantity (EOQ) Model is an

inventory management technique for determining

an itemsoptimal order size, which is the size that

minimizes the total of its order costs and carryingcosts.

The EOQ model is an appropriate model for the

management of A and B group items.



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Economic Order Quantity (EOQ) Model (cont.)

EOQ assumes that the relevant costs of inventory canbe divided into order costs and carrying costs.

Order costs are the fixed clerical costs of placing andreceiving an inventory order.

Carrying costs are the variable costs per unit of holding anitem in inventory for a specific period of time.

The EOQ model analyzes the tradeoffbetween ordercosts and carrying costs to determine the orderquantity that minimizes the total inventory cost.



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A formula can be developed for determining the firms EOQ for agiven inventory item, where

S = usage in units per period

O = order cost per order

C = carrying cost per unit per periodQ = order quantity in units

The order cost can be expressed as the product of the cost per orderand the number of orders. Because the number of orders equals theusage during the period divided by the order quantity (S/Q), the

order cost can be expressed as follows:

Order cost = cost per order x no. of orders

= cost per order x (usage during the period/order quantity)

= OS/Q




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The carrying cost is defined as the cost of carrying a unit of

inventory per period multiplied by the firmsaverage inventory.

The average inventory is the order quantity divided by 2 (Q/2),

because inventory is assumed to be depleted at a constant rate.

Thus carrying cost can be expressed as follows:

Carrying cost = CQ/2

The firmstotal cost of inventory is found by summing the ordercost and the carrying cost. Thus the total cost function is

Total cost = (OS/Q) + (CQ/2)




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Because the EOQ is defined as the order quantity

that minimizes the total cost function, we must

solve the total cost function for the EOQ. The

resulting equation is




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Assume that RLB, Inc., a manufacturer of electronic

test equipment, uses 1,600 units of an item

annually. Its order cost is $50 per order, and the

carrying cost is $1 per unit per year. Substitutinginto the above equation we get:


EOQ = 2(1,600)($50) = 400 $1



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The EOQ can be used to evaluate the total cost ofinventory as follows:


Ordering Costs = Cost per order x no. of orders/year

Carrying Costs = Carrying costs per unit x Order Size

2

Total Costs = Ordering Costs + Carrying Costs

Ordering Costs = $50 x 4 = $200

Carrying Costs = ($1 x 400)/2 = $200

Total Costs = $200 + $200 = $400



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Once the firm has determined its EOQ, it must determinewhen to place an order.

Reorder point is the point at which to reorder inventory.

More specifically, the reorder point must consider the leadtime needed to place and receive orders.

Because lead times and usage rates are not precise, mostfirms hold safety stock (extra inventory) that is held toprevent stockouts of important items.




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If we assume that inventory is used at a constantrate throughout the year (no seasonality), thereorder point can be determined by using the

following equation:



Reorder point = Lead time in days x daily usage

Daily usage = Annual usage/no. of days a firm operates per year


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MAX Company, a producer of dinnerware, has an A groupinventory item that is vital to the production process. Thisitem costs $1,500, and MAX uses 1,100 units of the itemper year. MAX wants to determine its optimal order

strategy for the item. To calculate the EOQ, we need thefollowing inputs: Order cost per order = $150

Carrying cost per unit per year = $200

Thus,


EOQ Model: Example


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The reorder point for MAX depends on the number of

days MAX operates per year.

Assuming that MAX operates 250 days per year and uses 1,100

units of this item, its daily usage is 4.4 units (1,100 250). If its lead time is 2 days and MAX wants to maintain a safety

stock of 4 units, the reorder point for this item is 12.8 units [(2

4.4) + 4].

However, orders are made only in whole units, so the order is

placed when the inventory falls to 13 units.


EOQ Model: Example (cont.)


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Just-in-time (JIT) System

A just-in-time (JIT) system is an inventory management techniquethat minimizes inventory investment by having materials arrive atexactly the time they are needed for production.

Because its objective is to minimize inventory investment, a JIT system

uses no (or very little) safety stock.

Extensive coordination among the firms employees, its suppliers, andshipping companies must exist to ensure that material inputs arrive ontime.

Failure of materials to arrive on time results in a shutdown of theproduction line until the materials arrive.

In addition, the inputs must be of near perfect quality (high-qualityparts) and consistency given the absence of safety stock.



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Computerized Systems for Resource Control

A materials requirement planning (MRP) system is aninventory management technique that applies EOQconcepts and a computerto compare production needs toavailable inventory balances and determine when

orders should be placed for various items on a productsbill of materials.

Manufacturing resource planning II (MRP II) is asophisticated computerized system that integrates datafrom numerous areas such as finance, accounting,marketing, engineering, and manufacturing andgenerates production plans as well as numerous financialand management reports.



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Computerized Systems for Resource Control

(cont.)

Enterprise resource planning (ERP) is a computerizedsystem that electronically integrates external informationabout the firms suppliers and customers with the firmsdepartmental data so that information on all availableresourceshuman and materialcan be instantlyobtained in a fashion that eliminates production delaysand controls costs.



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Accounts Receivable Management

The second component of the cash conversion cycle is

the average collection period. The average collection

period has two parts:

1. The time from the sale until the customer mails thepayment.

2. The time from when the payment is mailed until the firm

has the collected funds in its bank account.



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Accounts Receivable Management (cont.)

The objective for managing accounts receivable isto collect accounts receivable as quickly aspossible without losing sales from high-pressure

collection techniques.

Accomplishing this goal encompasses three topics:1. credit selection and standards

2. credit terms

3. credit monitoring



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Credit Selection and Standards

Credit standards are a firms minimum requirements forextending credit to a customer.

The five Csof credit are as follows:

1. Character: The applicantsrecord of meeting past obligations.2. Capacity: The applicantsability to repay the requested credit.

3. Capital: The applicantsdebt relative to equity.

4. Collateral: The amount of assets the applicant has availablefor use in securing the credit.

5. Conditions: Current general and industry-specific economicconditions, and any unique conditions surrounding a specifictransaction.



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Credit Selection and Standards (cont.)

Credit Scoring

Credit scoring is a credit selection method commonly used

with high-volume/small-dollar credit requests.

Credit scoring relies on a credit score determined by

applying statistically derived weights to a credit applicants

scores on key financial and credit characteristics.



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Changing Credit Standards

The firm sometimes will contemplate changing its credit

standards in an effort to improve its returns and create

greater value for its owners. To demonstrate, consider thefollowing changes and effects on profits expected to result

from the relaxation of credit standards.



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Dodd Tool is currently selling a product for $10 per unit. Sales(all on credit) for last year were 60,000 units. The variable costper unit is $6. The firms total fixed costs are $120,000.Thefirm is currently contemplating a relaxation of creditstandards that is expected to result in the following:

a 5% increase in unit sales to 63,000 units;

an increase in the average collection period from 30 days (the

current level) to 45 days;

an increase in bad-debt expenses from 1% of sales (thecurrent level) to 2%.



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Additional Profit Contribution from Sales

The firms required return on equal-risk investments, which is theopportunity cost of tying up funds in accounts receivable, is 15%.

Because fixed costs are sunk and therefore are unaffected by achange in the sales level, the only cost relevant to a change in salesis variable costs.

Sales are expected to increase by 5%, or 3,000 units. The profitcontribution per unit will equal the difference between the sale priceper unit ($10) and the variable cost per unit ($6). The profitcontribution per unit therefore will be $4. The total additional profitcontribution from sales will be $12,000 (3,000 units $4 per unit).



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Cost of the Marginal Investment in Account Receivable

To determine the cost of the marginal investment in accounts receivable,Dodd must find the difference between the cost of carrying receivablesunder the two credit standards.

Because its concern is only with the out-of-pocket costs, the relevant cost isthe variable cost. The average investment in accounts receivable can becalculated by using the following formula:



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Total variable cost of annual sales

Under present plan: ($6 60,000 units) = $360,000

Under proposed plan: ($6 63,000 units) = $378,000

The turnover of accounts receivable is the number of

times each year that the firms accounts receivable

are actually turned into cash. It is found by dividing

the average collection period into 365 (the number ofdays assumed in a year).



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Turnover of accounts receivable

Under present plan: (365/30) = 12.2

Under proposed plan: (365/45) = 8.1

By substituting the cost and turnover data just calculated into

the average investment in accounts receivable equation for

each case, we get the following average investments in

accounts receivable: Under present plan: ($360,000/12.2) = $29,508

Under proposed plan: ($378,000/8.1) = $46,667



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Cost of marginal investment in accounts receivable

Average investment under proposed plan $46,667Average investment under present plan 29,508

Marginal investment in accounts receivable $17,159Required return on investment 0.15

Cost of marginal investment in A/R $ 2,574

The resulting value of $2,574 is considered a cost becauseit represents the maximum amount that could have beenearned on the $17,159 had it been placed in the bestequally risky investment earning 15% before taxes.



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Cost of marginal bad debts

Under proposed plan: (0.02 $10/unit 63,000 units) = $12,600

Under present plan: (0.01 $10/unit 60,000 units) = 6,000Cost of marginal bad debts $ 6,600



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Managing International Credit

Credit management is difficult enough formanagers of purely domestic companies, and these

tasks become much more complex for companiesthat operate internationally.

This is partly because international operations typicallyexpose a firm to exchange rate risk.

It is also due to the dangers and delays involved in shippinggoods long distances and in having to cross at least twointernational borders.



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Credit Terms

Credit terms are the terms of sale for customerswho have been extended credit by the firm.

Cash Discount A cash discount is a percentage deduction from the

purchase price; available to the credit customer whopays its account within a specified time. For example, terms of 2/10 net 30 mean the customer can

take a 2 percent discount from the invoice amount if thepayment is made within 10 days of the beginning of thecredit period or can pay the full amount of the invoice within30 days.



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Credit Terms (cont.)

MAX Company has annual sales of $10 million and an averagecollection period of 40 days (turnover of acc. receivable = 365/40= 9.1).

In accordance with the firms credit terms of net 30, this period is

divided into 32 days until the customers place their payments in themail (not everyone pays within 30 days) and 8 days to receive,process, and collect payments once they are mailed.

MAX is considering initiating a cash discount by changing its credit

terms from net 30 to 2/10 net 30. The firm expects this change toreduce the amount of time until the payments are placed in the mail,resulting in an average collection period of 25 days (turnover of acc.receivable = 365/25 = 14.6).



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Cash Discount Period

A cash discount period is the number of days after thebeginning of the credit period during which the cash discountis available.

The net effect of changes in this period is difficult to analyzebecause of the nature of the forces involved. For example, if a firm were to increase its cash discount period

by 10 days (for example, changing its credit terms from 2/10 net

30 to 2/20 net 30), the following changes would be expected tooccur:1. Sales would increase, positively affecting profit.

2. Bad-debt expenses would decrease, positively affecting profit.

3. The profit per unit would decrease as a result of more peopletaking the discount, negatively affecting profit.



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Credit Period The credit period is the number of days after the

beginning of the credit period until full payment of theaccount is due.

Changes in the credit period, the number of days afterthe beginning of the credit period until full payment ofthe account is due, also affect a firmsprofitability.

For example, increasing a firmscredit period from net 30days to net 45 days should increase sales, positivelyaffecting profit. But both the investment in accountsreceivable and bad-debt expenses would also increase,negatively affecting profit.



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Credit Monitoring

Credit monitoring is the ongoing review of a firmsaccountsreceivable to determine whether customers are payingaccording to the stated credit terms.

If they are not paying in a timely manner, credit monitoring willalert the firm to the problem.

Slow payments are costly to a firm because they lengthen theaverage collection period and thus increase the firmsinvestmentin accounts receivable.

Two frequently used techniques for credit monitoring are averagecollection period and aging of accounts receivable.



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Credit Monitoring (cont.)

Average Collection Period The average collection period has two components:

1. the time from sale until the customer places the payment in the mail

2. the time to receive, process, and collect the payment once it has beenmailed by the customer.

The formula for finding the average collection period is:

Assuming receipt, processing, and collection time is constant, theaverage collection period tells the firm, on average, when itscustomers pay their accounts.



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Aging of Account Receivable

An aging schedule is a credit-monitoring technique

that breaks down accounts receivable into groups

on the basis of their time of origin.

It indicates the percentages of the total accounts

receivable balance that have been outstanding forspecified periods of time.



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Example: The accounts receivable balance on the books of Dodd Toolon December 31, 2012, was $20,000. The firm extends net 30-daycredit terms to its customers. To gain insight into the firmsrelativelylengthy51.3-dayaverage collection period, Dodd prepared thefollowing aging schedule.



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Popular Collection Techniques



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Management of Receipts and Disbursements

Float

Float refers to funds that have been sent by the payer but

are not yet usable funds to the payee. Float has three

component parts:1. Mail float is the time delay between when payment is placed inthe mail and when it is received.

2. Processing float is the time between receipt of a payment and its

deposit into the firmsaccount.

3. Clearing float is the time between deposit of a payment andwhen spendable funds become available to the firm.




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(cont.)

Speeding up collections

Speeding up collections reduces customer collection float time and

thus reduces the firmsaverage collection period, which reduces the

investment the firm must make in its cash conversion cycle.

A popular technique for speeding up collections is a lockbox system,

which is a collection procedure in which customers mail payments to a

post office box that is emptied regularly by the firmsbank, which

processes the payments and deposits them in the firmsaccount. Thissystem speeds up collection time by reducing processing time as well

as mail and clearing time.




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(cont.)

Slowing down payments

Float is also a component of the firms average payment

period.

Controlled disbursing is the strategic use of mailing points

and bank accounts to lengthen mail float and clearing float,

respectively.

This approach should be used carefully, however, because

longer payment periods maystrain supplier relations.




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(cont.)

Cash Concentration

Cash concentration is the process used by the firm to bringlockbox and other deposits together into one bank, often calledthe concentration bank. Cash concentration has three mainadvantages.1. First, it creates a large pool of funds for use in making short-term cash

investments. Because there is a fixed-cost component in the transactioncost associated with such investments, investing a single pool of fundsreduces the firmstransaction costs. The larger investment pool alsoallows the firm to choose from a greater variety of short-terminvestment vehicles.

2. Second, concentrating the firms cash in one account improves thetracking and internal controlof the firmscash.

3. Third, having one concentration bank enables the firm to implementpayment strategies that reduce idle cash balances.




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(cont.)

There are variety of mechanisms for transferring cash from

the lockbox bank and other collecting banks to the

concentration bank.

1. A depository transfer check (DTC) is an unsigned check drawn

on one of a firmsbank accounts and deposited in another.

2. An ACH (automated clearinghouse) transfer is a

preauthorized electronic withdrawal from the payers account

and deposit into the payees account via a settlement among

banks by the automated clearinghouse, or ACH.3. A wire transfer is an electronic communication that, via

bookkeeping entries, removes funds from the payersbank and

deposits them in the payeesbank.




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(cont.)

Zero-balance Account (ZBA)

A zero-balance account (ZBA) is a disbursement account that

always has an end-of-day balance of zero

The purpose is to eliminate nonearning cash balances in

corporate checking accounts.

A ZBA works well as a disbursement account under a cashconcentration system.

lecture 12_working capital and current assets management

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