Debtors' Payments: Fuzzy Approach to Planning

The financial aspect is essential to any kind of business. How a company receives funding and incomes determines its overall welfare. For any B2B company, one of the major concerns is the control over the payments of the non-bank debtors, i.e. the payments resulting from sales of goods and/or services. Indeed, this inflow enables the company to assess its efficiency, playing the role of the factor underlying the company's profits. Having produced some goods or services, the company sells the ware, receiving money for the ware -- which becomes income. The company crucially needs this income in order to be able to buy some raw materials and equipment needed to produce new portions of goods. Thus, it is essential that the company receives income regularly. What is regularity, in this case? It's in fact receiving the money on a predetermined schedule. The one that has been formed with a necessity in mind to meet the company's needs in financing its expenditures. However, we are living in a REAL world, which means that, inevitably, there are delays in debtors' payments. This, in turn, can lead to a complete breakdown of the financial plan. The latter may cause a non-reversible failure of the company. Effective planning of these delays is the key to successful financial management.

Given the stated facts, we arrive at the importance of a system that would be able to forecast potential delays in debtors' payments. Errors (deviations of the actual payment dates from forecasted dates) should be minimal in order for such a system to be considered effective. Now this is a tough point. Existing works show that ordinary statistical models cannot bear really effective results that would be stable in time. From our viewpoint, the best way to solve this issue is to use the so-called "fuzzy approach", which is based on the fuzzy set theory, originally suggested by L. Zadeh.

The basics of the fuzzy sets are explained in a huge amount of articles and books -- use web search engines to find out what fuzzy logic is and how it all works, if there's such a need. Here, we only suggest a ready-to-use principle of forecasting debtors' payments, basing on the fuzzy approach. The principle suggested in this article has been realized in the form of a computer program. The program has been tested on real data of a real company. The mean-square deviation thus calculated estimated 3, which suggests the idea that the principle presented herein is rather effective, but can be subject to further improvement.

Given a relational database (which may be in fact realized in any way, including but not limited to, MS Access, MS Excel DB-like data sets etc.) containing info on invoices, their birth dates, adjournment periods for each of the debtors, actual dates of debtors' payments that have occurred in the past, we can view the statistics "Past payment delays". The density function of this statistics can be viewed as a subnormal fuzzy set. This set, labeled "A", will be the first of the three fuzzy sets to be components of the resulting fuzzy set "payment date forecast". The density function can give us a general idea about the "payment discipline" of a specific debtor in the past. The density function, in a general case, will be containing several "waves" because it's usually not a trend-containing characteristic as to how many days a debtor will be evading from paying the debt.

Firstly, in most cases the amount of days of a payment delay is a random variable. It can be fluctuating within a couple days' limits. Secondly, statistical forecasts of delays may be differing significantly for different periods of time. This is because B2B relationships are not static, they are developing all the time. Sometimes, the selling company comes to "shaking hands" with the buying company for the latter to pay a couple days earlier, whereas sometimes the buying company may be facing temporary financial problems (e.g., resulting from a huge credit to be returned to a bank by the buying company), so that the buying company warns the selling company that there may be slight delays of payments. This is reflected in another component of the resulting fuzzy forecast, -- fuzzy set "C". It is in fact a linguistic variable "Payment delay most likely" fuzzy set. The linguistic variable may take one of the following values: "Neutral" (which means that there are no specific anticipations of the payments delay value for the specific debtor), "A slight delay is possible", "A slight delay is most likely", "A large delay is most likely", "An on-time payment is most likely", "Payment in advance is most likely". Each of these term-values has its own membership function. A corresponding membership function is used each time when building a forecast for a specific debtor. The membership functions for the term-values of the linguistic variable "Payment delay most likely" are given below:

"An on-time payment is most likely": y=SQRT(1-ABS(x)/2), x belongs to [-2;2]

"A slight delay is most likely": y=SQRT(1-ABS(x-4)/3), x belongs to [1;7]

"A slight delay is possible": y=(1-ABS(x-4)/3)**2, x belongs to [1;7]

"A large delay is most likely": y=SQRT(0.25-(12-x)/24)+0.5, x belongs [6;12]

y=(0.71-(6-x)/4.23)**2, x belongs to [3;6)

y=0, x

y=1, x>12

"Neutral": y=0.5

"A payment in advance is most likely": y=1/SQRT(ABS(x)), x

y=0, in any other cases

In the listed formulae SQRT(x) means "square root of x", ABS(x) means "the absolute value of x", x**y means "y-th power of x".

Finally, the fuzzy set B which is also used in calculating the resulting forecast, is in fact a triangular fuzzy number with the peak equal to the expectation function based on a "4 last payments" sample (the number of payments may be altered, depending on which value leads to a better efficiency of the forecast). The left and the right borders of the triangular fuzzy number "B" are respectively the minimum and the maximum values of the sample.

Now, as we have the three components of the forecast (fuzzy set A and fuzzy numbers B and C), we are able to build a resulting forecast. To do so, we transform the fuzzy sets A, B and C, so that their domains are identical, and calculate a weighted sum of these fuzzy sets (since in terms of our task these fuzzy sets are discrete, we are viewing their sum as the sum of vectors a, b and c, components for these vectors being the discrete values of the fuzzy sets A, B and C). Weighting coefficients are set for each of the fuzzy sets A, B and C; these weighting coefficients are defined as the coefficients that are providing best results; their values should be recalculated regularly (e.g., once a month).

In our tests, we used actual data of a Russian industrial company. In these tests, best results were achieved with coefficients 0.1, 0.6 and 0.3 for the fuzzy sets A, B and C, respectively.

Charitable Gift Annuity - Immediate, Deferred, College, Flexible Annuity

For some people, a Charitable Gift Annuity (CGA) is a convenient way to donate funds to an educational, religious or other charitable organization. A Charitable Gift Annuity works very similar to other annuities you might purchase through your insurance company, but in this case you will receive an annuity payment directly from the organization. Typically, you donate a monetary amount to the organization of your choice and then begin receiving payments either immediately or at a predetermined date in the future.

Donations to charities are subject to the charitable tax deduction, and you are entitled to make this deduction on your income tax return for each year you make a new donation. You can choose to receive your annuity payments yearly, quarterly, or monthly, although most people choose quarterly payments. Quarterly payments from a Charitable Gift Annuity are received on the last day of the quarter, not the first.

Similar to other annuity options, Charitable Gift Annuities are subject to state and federal regulations. The American Council on Gift Annuities (ACGA) sets uniform gift annuity rates for use by charitable organizations. These rates set the recommended limits for payout rates to the donor.

If a charity stays at or below these rates, they are not required to justify that their rates are within state regulatory laws. If the charity chooses rates above those set by the ACGA then an actuary is necessary to ensure compliance to the individual state laws. Rates are determined by the age of the annuitant and when the withdrawal period for the annuity begins.

A charity may spend a portion of a donation immediately but must retain enough money in its reserve to satisfy its annuity agreement with the donor. The agreement for Charitable Gift Annuities states that the annuitant will receive fixed payment amounts for their lifetime only and not an additional period of time thereafter for their beneficiaries.

This means that once an annuitant dies, payments cease and the remainder of the annuity is absorbed by the charity. The donor can opt to extend the annuity agreement to an additional annuitant, as with the joint and survivor or two lives in succession options, but the annuity payments will be split between the two individuals and will cease after both parties have died.

DIFFERENT TYPES OF CHARITABLE GIFT ANNUITIES:

IMMEDIATE GIFT ANNUITY

1. If you choose an Immediate Gift Annuity, payments will begin in the payment period immediately following the final contribution date. As mentioned previously, the annuitant can choose to receive payments annually, quarterly, monthly, etc. Depending on when the contribution was made, you can request your first payment to be for the full, and not prorated amount.

DEFERRED GIFT ANNUITY

2. With a Deferred Gift Annuity, the annuitant is allowed to receive payments at a future date predetermined by the donor. The date chosen must be at least one year from the contribution date, but the payout schedule offers the same flexibility as the Immediate Gift Annuity.

COLLEGE ANNUITY

3. A parent or grandparent may want to establish a college fund for a child to offset the rising cost of higher education. In this case, they would donate money for a College Annuity which will only pay out over the lifetime of the child (annuitant). Payments usually begin at age eighteen, or when the child/annuitant is old enough to attend college. The annuitant may choose payments for life or receive larger payments spread out over the number of years they attend school.

FLEXIBLE ANNUITY

4. A Flexible Annuity allows the annuitant to decide the starting date for payments. Usually the annuitant chooses retirement or another date of importance to begin receiving payments. Keep in mind that one factor for the annuity payment rate is age, so you will receive larger payments if you wait until you are older.

HOW DOES A CHARITABLE GIFT ANNUITY WORK?

You may be asking how this works in a real life example. Let's assume you just turned seventy-five and have $25,000 that you would like to donate to your alma mater as a Charitable Gift Annuity. You opt to receive immediate annuity payments on a yearly basis, and your calculated annuity rate is eight percent. Based on your annuity agreement with your alma mater, you will receive a payment for $2000 every year for the rest of your life, and an immediate tax deduction of over $9000!

This is only an estimate, and your actual deduction will vary according to changing tax laws and changing rates established by the ACGA. You should always consult with a knowledgeable financial advisor such as Estate Street Partners before donating or investing large sums of money to guarantee your rights are protected.

When Should You Not Cash Out Your Annuity?

You should not cash out your rente when it’s not in your best interest. Here are 3 grounds it might not be in your best interest; it’s too soon, you don’t have got a good adequate reason, it will cost you too much. Every twenty-four hours person cashes out their rente or settlement when it might not have got been in their best interest. It’s Associate in Nursing easy error to do when the phone call of money and load of financial emphasis is weighing heavily on you. But read carefully and maybe you can avoid excavation the hole deeper.

If you are a minor, or the parent of a minor trying to cash out an annuity, it’s too soon. Courts will rarely O.K. an advance of a minor league settlement except in cases of utmost need. A defender will need to be appointed to do certain the transaction is in the best interests of the minor and not the parent. Another manner it can be too soon, your payments are too far away. $100,000 owed in 2025 is not going to get you $100,000 today. In fact, you won’t even get $25,000. The payout day of the month is too far away.

Unless you have got a good adequate reason. If you experience secure that your $25,000 dollars will give over the adjacent 20 old age a tax return equivalent to the $100,000 you would have got received, than maybe it’s not such as a bad idea. Plenty of tribunals around the country will be very interested in your ground for acceleration your settlement or rente payments. Judges make their best to measure for you whether the transaction is your best option. Turning in your monthly payments to purchase a new car may not be the best idea. Buying a home, attending school, averting financial disaster, keeping a home, of import medical needs, all are great grounds to cash in future payments. Anything else rates a second expression and more than serious consideration.

What also rates serious consideration is the underside line. If you have got to give up 50% Oregon more than of your annuity’s value is it deserving it? That’s A very expensive purchase you are making when you give up $100,000 to get $25,000. And if your $25,000 bargains you a car that depreciates and interruptions down in 5 years, you have got so small to demo for your money. I believe investing in start up businesses, vacations, recreational vehicles, and amusement points are often questionable grounds to cash in structured settlement payments.

The courts, the settlement cash out companies, your household and friends will all have got their sentiments as to whether you should get an advance on your hereafter payments. But the hazard and duty to do the best possible pick rests on your shoulders. Ask yourself if what you are getting is deserving what you are giving up. There are great grounds to get your money sooner rather than later, but there are also modern times when cashing out is not in your best interest.

Debt Collection Basics - Wondering What To Tell Collection Agency?

Are you getting calls from debt collectors? Threatening letters in the mail perhaps? These are two commonly used approaches used by collection agencies to intimidate you into paying up. It is important to know what rights you have in such a situation.

Fortunately something called 'The Fair Debt Collection Practices Act' sets the guidelines what actions debt collection agencies can and cannot participate in while trying to collect a debt. For example, they cannot call earlier than 8 AM Or after 9 PM. They cannot claim that they'll be able to garnish wages. Of course, this is limited to states in which garnishment of wages is illegal. And, they cannot continue calling you if you ask them to stop.

The entire text is worth looking through if you are in this situation. You can read it here - http://www.ftc.gov/os/statutes/fdcpa/fdcpact.htm#801

In such situations you have multiple options. These range from simply not picking up the phone, screening calls via caller ID or even getting calls blocked if your phone has that feature.

By any chance if you do pick up the phone, you can insist that you do not wish to be contacted any further. By law, they are obligated to stop pestering you. Of course, if you have sent the collectors a formal notice (such as 'cease and desist') you can take legal action against them. This could be your most expensive option so you might want to hold off on this one.

The fastest way to get them off your back is by paying off the debt. If the debt is a valid one then you do owe them the money. If money is really tight, you can try by renegotiating the terms of your agreement like lower rates of interest etc.

Keeping track of your call history along with any terms that were renegotiated is a good idea in these cases. This will help you keep tabs on your new debt obligations and in case they keep calling you after being told not to stop you can try recording calls if its legal and take action against them. Pretty often the debt collectors will be more careful with their choice of words if they know that their call is being recorded.

One key point to bear in mind is that collection agencies will accept amounts that are a lot lesser than their original claims. Of course, since they get a percentage of their collection amounts they will try to keep the amounts similar to the originating debt. But they do know that 50% of $200 is a lot better than a 100% of $0.

If you do negotiate new terms on your payment, make certain that there aren't going to be any additional negative information placed on your credit history. Its always a good idea to remind them to report any payments you make.

One other tip - get the creditor to send you the terms in writing. If they are unwilling to do so, you can send them a small percentage of the amount to show good faith in keeping your end of the deal. If you pay all of it upfront, they have little reason to honor their end of the bargain.

In times like these be patient, keep your cool and be realistic about the outcomes. These attributes will be immensely beneficial while dealing with these stressful situations.

Managing Bank Liquidity in Real Time

Just a decade ago the concept of bank liquidity was for all intents and purposes only one for the Bank Regulator to really concern himself with. A bank had to remain liquid –critical if it were to enjoy the confidence of its depositors – but this criticality was an “after the event” issue.

Then banks enjoyed a high degree of anonymity and choice in how it managed its liquidity. This was as a result of the techniques then used for settling interbank obligations. These techniques had been devised and refined over two or more centuries. They had come from a pre-computer world that relied on manual transaction processing of instruments such as cheques. Early moves at computerization of bank processes simply mechanized the manual approach by using the batch processing system. So the critical factor that related to the measuring of a bank’s liquidity could only be determined after the end of the trading day had been completed and all the “ins” and the “outs” were matched up. Even then, a bank had a safety net, provided by the central bank, which in most countries was prepared to cover any shortfall, and then to backdate this cover to the previous trading day.

A growing understanding of settlement risk and the possible contagion to systemic failure led central banks, almost without exception, to implement payment systems, usually under their own direct control that ensured finality of settlement. Real Time Gross Settlement (RTGS) especially where high value payments were involved has become the accepted mechanism of ensuring safety in national payment systems.

This was followed by the need to ensure that the settlement of stock exchange transactions also took place in a secure manner and that delivery of the shares was only against the exchange of a payment that was final and irrevocable. The RTGS approach fitted this need admirably.

Foreign exchange settlements were the next problem. The collapse of the Herrstadt Bank had caused major problems. The solution propsed by a group of major international banks was for the CLS (continuous linked settlement) system which won the approval of the major central banks. Again the RTGS system was pressed into use to provide the secure payments leg.
Additional factors such as straight through processing (STP) provided the reward of error free transactions. All this has added to the need to manage liquidity in real time.

Each new payment dimension (i.e. RTGS, DvP, CLS) adds to the complexity of the problem. Funds flows now involve domestic, foreign and securities payments as a minimum – each flow is really dependent on the other flows. There may be other dimensions too, depending on local arrangement and conditions, where other settlements may be require to be settled in real-time and on RTGS principles, such as ACH operations or cheque clearing operations.

The complexity of these requirements was the subject of an intensive study in 2000 by the Payments Risk Committee of the Federal Reserve Bank of New York (“Interday Liquidity in the Evolving Payment System: A study of the impact of the Euro, CLS Bank and CHIPS finality”). The study examined the potential implications for US dollar intraday liquidity risks that would come about from planned changes to payment systems in the US and elsewhere. In the words of the committee the report was “intended to stimulate dialogue on the issue and to suggest some possible best practices”. Even though the main focus was on the liquidity effect to banks in the US, the problems and the solutions are applicable to banks everywhere. A key finding is quoted below in full, and illustrates the direction in which bank liquidity management has been heading.

“These changes will create a need for better measurement of payments flows, use of queuing techniques to regulate payment flows, better communications, and a generally higher awareness by treasury managers of developments in the payments processing functions. Payment operations will assume some of the characteristics of continuous industrial processes where real-time measurement is required to assess the buildup of imbalances within systems, identify gridlocks within and between systems, and establish more elaborate contingency plans. The interconnections between systems will also require new control processes in order to cope with unexpected volume and systems changes.”

Bank liquidity management is a critical area. However, up to the present time, many banks have not yet fully realized the effects that the real-time flows of funds have on their operations.

Depending on the size of the bank, the basic problem that is faces will be different. As an example, in a smaller bank, the problem could well be one of trying to match the magnitudes of the inflows and the outflows in "approximate" real-time. This sort of problem does not arise in the case of the larger banks simply because they send and receive high volumes of payments almost continuously throughout the day. So essentially they have a natural flow of funds that helps with the matching process. In countries where CLS is now fully operational banks have found that they have another dimension to this real-time aspect. What has happened is a whole range of fresh scenarios as a result of interactions between the liquidity side of the RTGS system (which one must remember are real-time domestic payments) and the CLS system (which is real-time Forex settlement). A further example of this process is the RTGS interaction with the securities system.
One way to view the problem is to envisage a game of chess. The real-time liquidity challenge presented by an RTGS system alone, can be viewed as a game of chess, in two dimensions. However once one adds CLS, Securities and other real-time funds flows one begins to add additional “chessboards” to the first. One can visualize these extra chessboards as being stacked vertically so that in reality there are a number of games in three dimensions, one above each other. They are all being played at the same time and each game is affected by and interacts with each of the others. Checkmate on any one level can lead to checkmate on all the others. In essence one is forced to play a game of 3-dimensional chess, replacing the traditional one.

To successfully manage intraday payment liquidity involves a high degree of technical and analytical skill. Until recently the technical complications of successfully implementing such a system on a bank wide basis have been difficult to overcome. New technologies are changing this.
The basic principle of such a system lies in the effective modeling of payment inflows and outflows on a timed basis throughout the trading day. To model these flows three key information sources are required:

•Actual data. Actual data relating to payments that have already been received or made

•“In the Pipeline”. Data relating to “pending” payments. This may be payments in an internal RTGS queue, or scheduled to be made in terms of CLS or any other commitment. In certain cases inward payments may also be modeled with certainty such as CLS settlements due

•Forecast of payments flows. In some cases an estimate will need to be made of unaccounted for payment flows that are anticipated for the remainder of the trading day. This information may be based on historical data adapted in terms of day, the time of the month, fiscal calendar events and so on.

The timing of these various flows may be entirely random, as in an RTGS system or it may be to a specific schedule linked to pre-defined settlement times such as for ACH, Securities, CLS, Cheque and other similar settlements. The range of payments that need to be covered is essentially the whole range of payments that the bank is involved in clearing. For a typical bank this may involve all or most of the following elements:

•The RTGS system

•CLS obligations either as a direct participant or as a sponsored member or conventional foreign exchange flows

•Securities settlements
These three flows are relatively straightforward as they only involve the “credit” flow of funds – this means that payments are generated by the paying to the payee bank.

•ACH operations which will include the conventional debit and credit payment flows as well as Giro type payments

•Cheque clearing operations

•Credit/ Debit card clearing operations which would include EFTPOS transactions

•Other transaction flows such as the settlement of actual banknote withdrawals and deposits with the central bank or other parties.

These four scenarios are more complex in that they involve the processing of both credit and debit transactions, usually in the same systems. An example to illustrate what is meant would be a bank sending out both credit and debit ACH transactions – Credit payments would be an outflow to the bank, while debit transactions would represent an inflow of funds. The process is made more complex by the fact that very often transactions are returned for one reason or another – cheques will not be paid; credit transfers cannot be applied because the account has been closed etc.

An often heard criticism against including the flows for these last four systems in an overall liquidity management system is that while they represents high volumes of transactions their value tends to be insignificant and hence irrelevant to the overall position of the bank. This depends entirely on the customs and practices of the banking operations in the country concerned. In some countries values of cheque and non-RTGS electronic payments may exceed the total of RTGS values. In others cheques, as an example, still represent a significant volume and sometimes significant values.

The technique in managing intraday payment flows is relatively simple in principal – more difficult though in practice.
The techniques described below are based on the well-established process used by many of the world’s larger banks to manage their overall liquidity position in terms of assets and liabilities. Banks use this technique or a variation of it over a period of weeks or months. This technique can be adapted to manage the specific requirements of a bank intraday and end-of-day payments flow.

While this technique focuses on the use of the framework by larger banks in-so-far as the range and diversity of the various payment systems used, this approach is equally applicable to bank payment liquidity measurement and control, even for local, strictly domestic banks. The basic principles revolve around:

•Good management

•Information systems

•Centralized liquidity control

•Analysis of net funding requirements under alternative scenarios, and

•Contingency planning

All these are crucial elements of strong payment liquidity management at a bank of any size or scope of operations.
The information systems and analysis needed to implement the approach, however, can probably absorb fewer resources and be much less complex at a local bank or a bank that is active in fewer payment systems than the large, internationally active banks.

A bank’s “Treasury Manager” needs not only to have the appropriate liquidity available, but also he needs to have a range of strategies to help him fight this “war”. The strategies and techniques that he will use will include derivatives, swaps, repurchase agreements etc.

The Treasurer’s office has become the command post in this new liquidity “battle” and a key element is going to be the information that he will need for each day’s operations. This information will include details of:

•Current day transactions and flows

•Details of transactions that are still in the “pipe-line”

•Estimates of expected transactions (for those transactions that have not quiet reached the pipeline), but based on know events, trends and historical information.

•Some very intelligent computing that combines all these sources of information into a single scenario that the bank treasures can use, effectively.