Electronic Data Interchange The End of Float

Electronic data interchange (EDI) is a general term that refers to the growing practice of direct, electronic information exchange between all types of businesses. One important use of EDI, often called financial EDI, or FEDI, is to electronically transfer financial information and funds between parties, thereby eliminating paper invoices, paper checks, mailing, and handling. For example, it is now possible to arrange to have your checking account directly debited each month to pay many types of bills, and corporations now routinely directly deposit paychecks into employee accounts. More generally, EDI allows a seller to send a bill electronically to a buyer, thereby avoiding the mail. The seller can then authorize payment, which also occurs electronically. Its bank then transfers the funds to the seller's account at a different bank. The net effect is that the length of time required to initiate and complete a business transaction is shortened considerably, and much of what we normally think of as float is sharply reduced or eliminated. As the use of FEDI increases (which it will), float management will evolve to focus much more on issues surrounding computerized information exchange and funds transfers.

One of the drawbacks of EDI (and FEDI) is that it is expensive and complex to set up. However, with the growth of the Internet, a new form of EDI has emerged, Internet e-commerce. For example, networking giant Cisco Systems books about $11 million in orders each day on its web site from resellers around the world. The CEO of Cisco estimates that the firm saved $1.4 billion in technical support, marketing, distribution, and working capital management costs in 2001 by exploiting the Web. Firms are also linking to critical suppliers and customers via "extranets," which are business networks that extend a company's internal network. Because of security concerns and lack of standardization, don't look for e-commerce and extranets to eliminate the need for EDI anytime soon. In fact, these are complementary systems that will most likely be used in tandem as the future unfolds.

Ross et al.: Fundamentals VII. Short-Term Financial 20. Cash and Liquidity of Corporate Finance, Sixth Planning and Management Management

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

20. Cash and Liquidity Management

© The McGraw-Hill Companies, 2002

PART SEVEN Short-Term Financial Planning and Management

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