Question

What is a disbursement system and why is it an important part of short-term financial management?

What are the advantages of switching from decentralized to centralized dibursing?

Answer 1

A Company'ss disbursement system refers to the methods of payment and the banks and locations chosen for disbursement. Disbursement system is a very important part of the short term financial management of a company. This is because it can affect the value of the company by altering the cost structure of the company and it also affects the cash conversion cycle of the company. An efficient disbursement system optimizes the accuracy and timeliness of information at minimal costs. The cash conversion period refers to the time between receipt of cash and payment of cash. Shorter the cash conversion period lower are the working capital costs of the business. Hence an efficient disbursement system reduces the working capital cost of a company.

The centralised disbursement system allows intensive checking of each disbursement and payment by the headquarters staff. It reduces the chances of frauds in the disbursement process. Centralised disbursement system ensures that building is matched with cash inflows. It allows the firm to streamline the number of accounts that must be maintained and hence reduces the number of transactions.