Remote disbursement is a cash management technique used by companies to deliberately increase the float between the time a check is written and the time it is cleared. Float refers to the time difference between when a payment (like a check) is made and when the funds are actually withdrawn from the payer’s account.
In remote disbursement, a company writes checks from a bank located in a distant location, knowing that the physical distance will likely add a few days to the check-clearing process. This allows the company to potentially earn interest or make use of the funds for a few more days before the check is actually presented for payment.
It’s important to note that while remote disbursement can be seen as a legitimate cash management strategy, it can sometimes be viewed as an unethical practice, especially when used to misrepresent a company’s actual cash position or when it leads to deliberate payment delays.
Example of Remote Disbursement
Let’s delve into a more detailed and fictional example to illustrate the concept of remote disbursement.
Example: Remote Disbursement by “Urban Styles Ltd.”
“Urban Styles Ltd.” is a clothing retailer based in Miami, Florida. They have suppliers all over the country, and they’ve historically used a local Miami bank for most of their financial transactions.
They’ve learned about the remote disbursement strategy and decided to open an account with a bank in Seattle, Washington, to implement this technique and potentially benefit from the float.
- Order & Invoice: “Fabrics Galore,” a major supplier for Urban Styles Ltd. based in Orlando, Florida, sends an invoice of $50,000 for a recent shipment of fabric.
- Check Issued: Instead of writing a check from their Miami bank, Urban Styles Ltd. decides to issue a check from their Seattle bank account for this payment.
- Delay in Clearing:
- Fabrics Galore deposits the check in their Orlando bank.
- Due to the check being drawn on a Seattle bank, it takes an additional 3 days for the check to clear and for the funds to be debited from Urban Styles Ltd.’s account.
- Benefit to Urban Styles Ltd.:
- During those 3 days, Urban Styles Ltd. can use the $50,000 for other short-term needs or potentially earn interest if the funds are in an interest-bearing account.
- Potential Issues:
- If Fabrics Galore becomes aware of this strategy and feels that Urban Styles Ltd. is deliberately delaying payments, it might harm the business relationship.
- Fabrics Galore might start demanding faster payment methods or even electronic transfers to avoid such delays.
While Urban Styles Ltd. benefits in the short term from the additional float period, they must weigh this benefit against potential relationship issues with suppliers and any ethical considerations associated with deliberately delaying payments.
In the era of digital banking and instant transfers, such strategies can also come across as outdated, and suppliers might expect more modern and faster payment methods.