Remote Disbursement

Key Takeaways

• Remote disbursement exploits the Fed's check-clearing inefficiencies to increase a firm's cash float.
• The technique involves writing checks from a bank far from the payee to delay cash deduction.
• The Federal Reserve discourages remote disbursement, but cannot stop companies from practicing it.
• Companies can also use zero-balance accounts or trade credits to extend disbursement float.
• Firms can boost cash flow by slowing payments and speeding up collections with lockbox banking.

What Is Remote Disbursement?

Remote disbursement is a cash-flow strategy in which a company increases float by exploiting Federal Reserve check-clearing inefficiencies, often by drawing checks on a geographically remote bank. This keeps cash in the account longer, which can boost interest earnings through higher-yield accounts. The Federal Reserve discourages the practice, but it still appears in cash-management planning.

How Remote Disbursement Works

The Federal Reserve discourages the practice of remote disbursement, and today it clears almost all checks within one business day,1 so it is the Fed, not the writer nor the recipient of the check, that loses in the remote-disbursement game. The recipient never has to wait more than one day to receive payment, so it will not necessarily object to doing business with companies that practice remote disbursement.

Other ways companies extend disbursement float include zero-balance accounts and purchasing supplies and services on credit (managing trade payables).

The term float is used in finance and economics to describe duplicate money present in the banking system during the time between when a deposit is made in the recipient's account and when the money is deducted from the sender's account. Float is also associated with the amount of currency available to trade—i.e. countries can manipulate the worth of their currency by restricting or expanding the amount of float available to trade. Float is most apparent in the time delay between a check being written and the funds to cover that check being deducted from the payer's account.

Tip

Financial institutions invest a lot of resources to manage float, cash management best practices, and utilizing remote disbursements when possible.

Strategies for Maximizing Remote Disbursement Benefits

A company that wants to use remote disbursement to its full advantage needs to also minimize its collection float, or the time it takes to receive payments. Companies can speed up their collections through techniques that reduce float, such as concentration banking and lockbox banking. By slowing down payments and speeding up collections, a company increases its net float and therefore its cash balance.

When a depository institution receives deposits of checks drawn on other institutions, it may send the checks for collection to those institutions directly, deliver them to the institutions through a local clearinghouse exchange, or use the check-collection services of a correspondent institution or a Federal Reserve Bank. For checks collected through the Federal Reserve Banks, the accounts of the collecting institutions are credited for the value of the checks deposited for collection and the accounts of the paying banks are debited for the value of checks presented for payment.1