THE CASE OF THE MISSING CHECK

The Millbridge Recreation Department has come under intense scrutiny. First there were concerns because revenues for the year fell short of predictions. Then town residents started complaining to the mayor that the town had cashed their checks for use of the town pool several months after they were written, and in some cases checks were never cashed.

One irate resident, George Loudly, had complained about a payment he contended that he made for the town pool. The Recreation Department manager, Tenn Uswim, had insisted that payment had never been received and suggested that perhaps the check was lost in the mail. Loudly had countered that he dropped the check off in person. The disagreement had reached an impasse, and the resident had filed formal notice with the town that he intended to take the floor at the public forum session during the July town meeting. In response the mayor requested that the recreation manager attend the meeting.

Loudly provided his side of the situation at the July meeting. Then several friends that he brought to the meeting spoke, indicating that their checks had been cashed but not until several months after they sent them to the town. The recreation manager was given an opportunity to respond. Uswim indicated that his policy was to gather checks and have someone run them over to the bank for deposit from time to time. He argued that the money wasn't needed until the pool opened several months after payments were collected, so he didn't see a need to rush checks to the bank. After all, once deposited, he just kept the money in a non-- interest--bearing account.

The residents countered that not only was the town losing the opportunity to earn a return by investing the pool money, but worse, it stood to lose money if payments were misplaced. The recreation manager argued that payment checks could not possibly be lost, because he kept them all safely on top of his desk,usually under a paperweight. He contended that those who claimed their checks weren't cashed obviously never made their payments.

That remark was perhaps not well considered. Loudly felt that the recreation manager was accusing him of lying about having paid his pool fee. Uswim's contention all along was that if Loudly really had paid his fee, he should produce a cancelled check as proof. Loudly contended that he paid in person and the check was just not cashed because of government incompetence. Immediately after Uswim's remark, Loudly insisted on being allowed to immediately search the recreation department office for his check.

The mayor didn't want to give in, but he had known Loudly a long time and respected his honesty. Uswim didn't object, so the meeting moved downstairs to the Rec office. The town sheriff was asked to conduct a thorough search. Within 10 minutes, he had found five checks on the floor under desks and behind file cabinets. The dates on the checks ranged from 1 week to 2 years old. One of the checks was George Loudly's payment.

At this point several residents shouted out that they had paid in cash, and how did they know if their cash was deposited or was also lost. The mayor was at a loss for words. He quickly agreed to hire an outside consultant to evaluate the town's cash management practices. You have just accepted that engagement.

Assignment:

Why should the town hold on to cash?

In what form should it hold the cash?

What practices and procedures would you suggest that the town consider to improve its management of short--term resources in general and cash in particular?

A good answer should at least touch upon the following:

1. The three reasons for holding cash (transactions, safety, investment).

2. The fact that when we speak of holding cash, most of that cash is held in the form of bank accounts, rather than currency on hand.

3. The potential benefits of using a lock box and/or electronic payment.

4. The tradeoff of liquidity versus higher return on invested cash.

5. The importance of a cash budget in providing information about when cash will be needed.

6. The benefits of concentration banking.

7. The importance of maintaining security over cash.

8. Alternative short--term investments.