TQM

 

Basic Principles of Total Quality Management (TQM)

The basic principles for the Total Quality Management (TQM) philosophy of doing business are to satisfy the customer, satisfy the supplier, and continuously improve the business processes.

• Questions you may have include:
• How do you satisfy the customer?
• Why should you satisfy the supplier?
• What is continuous improvement?

Satisfy the customer

The first and major TQM principle is to satisfy the customer--the person who pays for the product or service. Customers want to get their money's worth from a product or service they purchase.

Users

If the user of the product is different than the purchaser, then both the user and customer must be satisfied, although the person who pays gets priority.

Company philosophy

A company that seeks to satisfy the customer by providing them value for what they buy and the quality they expect will get more repeat business, referral business, and reduced complaints and service expenses.

Some top companies not only provide quality products, but they also give extra service to make their customers feel important and valued.

Internal customers

Within a company, a worker provides a product or service to his or her supervisors. If the person has any influence on the wages the worker receives, that person can be thought of as an internal customer. A worker should have the mind-set of satisfying internal customers in order to keep his or her job and to get a raise or promotion.

Chain of customers

Often in a company, there is a chain of customers, -each improving a product and passing it along until it is finally sold to the external customer. Each worker must not only seek to satisfy the immediate internal customer, but he or she must look up the chain to try to satisfy the ultimate customer.

Satisfy the supplier

A second TQM principle is to satisfy the supplier, which is the person or organization from whom you are purchasing goods or services.

External suppliers

A company must look to satisfy their external suppliers by providing them with clear instructions and requirements and then paying them fairly and on time.

It is only in the company's best interest that its suppliers provide it with quality goods or services, if the company hopes to provide quality goods or services to its external customers.

Internal suppliers

A supervisor must try to keep his or her workers happy and productive by providing good task instructions, the tools they need to do their job and good working conditions. The supervisor must also reward the workers with praise and good pay.

Get better work

The reason to do this is to get more productivity out of the workers, as well as to keep the good workers. An effective supervisor with a good team of workers will  certainly satisfy his or her internal customers.

Empower workers

One area of satisfying the internal suppler is by empowering the workers. This means to allow them to make decisions on things that they can control. This not only takes the burden off the supervisor, but it also motivates these internal suppliers to do better work.

Continuous improvement

The third principle of TQM is continuous improvement. You can never be satisfied with the method used, because there always can be improvements. Certainly, the competition is improving, so it is very necessary to strive to keep ahead of the game.

Working smarter, not harder

Some companies have tried to improve by making employees work harder. This may be counter-productive, especially if the process itself is flawed. For example, trying to increase worker output on a defective machine may result in more defective parts.

Examining the source of problems and delays and then improving them is what is needed. Often the process has bottlenecks that are the real cause of the problem. These must be removed.

Worker suggestions

Workers are often a source of continuous improvements. They can provide suggestions on how to improve a process and eliminate waste or unnecessary work.

Quality methods

There are also many quality methods, such as just-in-time production, variability reduction, and poka-yoke that can improve processes and reduce waste.

Summary

The principles of Total Quality Management are to seek to satisfy the external customer with quality goods and services, as well as your company internal customers; to satisfy your external and internal suppliers; and to continuously improve processes by working smarter and using special quality methods.

Income Tax Ordinance 2001

 

Taxation System in Pakistan

Federal taxes in Pakistan like most of the taxation systems in the world are classified into two broad categories, viz., direct and indirect taxes. A broad description regarding the nature of administration of these taxes is explained below:Tax Laws of Pakistan

Direct Taxes

Direct taxes primarily comprise income tax, along with supplementary role of wealth tax. For the purpose of the charge of tax and the computation of total income, all income is classified under the following heads:
1. Salaries
2. Interest on securities;
3. Income from property;
4. Income from business or professions
5. Capital gains; and
6. Income from other sources.

Personal Tax

All individuals, unregistered firms, associations of persons, etc., are liable to tax, at the rates randing from 10 to 35 per cent.

Tax on Companies

All public companies (other than banking companies) incorporated in Pakistan are assessed for tax at corporate rate of 39%. However, the effective rate is likely to differ on account of allowances and exemptions related to industry, location, exports, etc.

Inter-Corporate Dividend Tax

Tax on the dividends received by a public company from a Pakistan company is payable at the rate of 5% and at the rate of 15% in case dividends are received by a foreign company. Inetr-corporate dividends declared or distributed by power generation companies is subject to reduced rate of tax i.e., 7.5%. Other companies are taxed at the rate of 20%. Dividends paid to all non-company shareholders by the companies are subject to with holding tax of 10% which is treated as a full and final discharge of tax liability in respect of this source of income.'

Treatment of Dividend Income

Dividend income received as below enjoys tax exemption, provided it does not exceed Rs. 10,000/-.
1. Dividend received by non-resident from the state enterprises Mutual Fund set by the Investment Corporation of Pakistan.
2. Dividends received from a domestic company out of income earned abroad provided it is engaged abroad exclusively in rendering technical services in accordance with an agreement approved by the Central Board of Revenue.

Unilateral Relief

A person resident in Pakistan is entitled to a relief in tax on any income earned abroad, if such income has already been subjected to tax outside Pakistan. Proportionate relief is allowed on such income at an average rate of tax in Pakistan or abroad, whichever is lower.

Agreement for avoidance of double taxation

The Government of Pakistan has so far signed agreements to avoid double taxation with 39 countries including almost all the developed countries of the world. These agreements lay down the ceilings on tax rates applicable to different types of income arising in Pakistan. They also lay down some basic principles of taxation which cannot be modified unilaterally. The list of countries with which Pakistan has concluded tax treaties is given below:

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Austria	Belgium	Bangladesh	Canada
China	Denmark	Egypt	France
Finland	Germany	Greece	India
Indonesia	Iran	Ireland	Italy
Japan	South Korea	Lebanon	Libya
Malta	Mauritius	Saudi Arabia	Singapore
Poland	Romania	Switzerland	Thailand
Sri Lanka	Sweden	Turkmenistan	U.K.
Turkey	Tunisia	Kazakistan	U.A.E.
U.S.A

Customs

Goods imported and exported from Pakistan are liable to rates of Customs duties as prescribed in Pakistan Customs Tariff. Customs duties in the form of import duties and export duties constitute about 37% of the total tax receipts. The rate structure of customs duty is determined by a large number of socio-economic factors. However, the general scheme envisages higher rates on luxury items as well as on less essential goods. The import tariff has been given an industrial bias by keeping the duties on industrial plants and machinery and raw material lower than those on consumer goods.

Central Excise

Central Excise duties are leviable on a limited number of goods produced or manufactured, and services provided or rendered in Pakistan. On most of the items Central Excise duty is charged on the basis of value or retail price. Some items are, however, chargeable to duty on the basis of weight or quantity. Classification of goods is done in accordance with the Harmonized Commodity Description and Coding system which is being used all over the world. All exports are exempted from Central Excise Duty.

 

Benchmarking

Benchmarking is the general name given to a range of techniques which involve comparisons between two examples of the same process so as to provide opportunities for learning. Benchmarking can, for example, be used to compare how different companies manage the product development processes; where one is faster than the other there are learning opportunities in trying to understand how they achieve this. The approach has been widely used — for example in the field of quality management where it is used to drive the development of improvements in business performance, in software development and in developing continuous improvement systems.

One of the best-known examples of benchmarking as a learning resource are the activities within the International Motor Vehicle Programme, which has systematically collected and exchanged information on nearly all car assembly plants in the world. It can show how different plants are more or less effective on a range of measures — and in doing so it focuses the attention of other plant managers on how this is being achieved. It has acted as a powerful catalyst for learning in that industry and the model of benchmarking has been extended to other domains such as aerospace manufacturing and construction.

Project evaluation tools

Decisions on where to invest the company's resources to achieve a technological innovation have a major impact on the future competitiveness of the company. Therefore, trying to get involved in the right projects is worth an effort, both to avoid wasting the company's time and resources in meaningless activities, and to improve the chances of success.
However, in a continuous improvement context, ideas for change and projects which need significant resources might be prioritized rather than selected, with a view to all projects eventually being addressed.
In short, project evaluation aims at analyzing research and development projects, or activities or ideas, for any or all of the following purposes:

• Getting an overall understanding of the project.
• Making priorities among a set of projects.
• Taking a decision about whether or not to proceed with a project.
• Monitoring projects, e.g. by following up the parameters analyzed when the project was selected.
• Terminating projects and evaluating the results obtained.

Why and when are they used?

To provide information to assess the value of a potential project with particular reference to the estimation of costs, resources and benefits, in order to take a decision about whether or not to proceed with the project. A secondary use is for monitoring and terminating projects.

How do they work?

A very long list of specific techniques have been developed over the years, and are still being developed and used today, both within companies and in the academic world. Most of those techniques can be described by means of some common elements which form the backbone structure of any project evaluation technique.

Figure 1

Main elements of Project Evaluation

The inputs:

the data on important aspects of the projects and the business environment which are needed to analyze them. The inputs will be assembled from various sources, and care should be taken to ensure its certainty, although some inputs will surely be very subjective. At the end of the day, an evaluation can only be as good as the data that go into it.

Table 1
Typical inputs to Project Evaluation

Typical inputs
Technological	the technical activities which will have to be undertaken, maturity of technology, company's technological position
Internal	potential technical success, familiarity with the area of the project, role of individuals and of different functions within the organization
Financial	expected benefit, likely cost, both of project and consequent actions
Market	size and attractiveness of the market, competitive position
Business	clarification of objectives, fit with company's strategy, level of top-management support, key success factors

• Weighting: as certain data may be given more relevance than other (eg of market inputs compared with technical factors), in order to reflect the company's strategy or the company's particular views. The data is then processed to arrive at the outcomes.
• Many techniques include balancing between projects, as the relative value of a project with respect to other projects is an important factor in situations of competition for limited resources. Portfolio manageportment techniques are specifically devoted to deal with this factor.
• The techniques might also incorporate how the results of the evaluation have to be communicated among the interested parties, as well as the way to proceed in order to make the final decision. Eventually, no technique should be allowed to take decisions, as this is a management responsibility. Even when expert systems are used managers have the final word.

Project evaluation usually assumes that there is a choice of projects in which to invest, but businesses may only be able to do R&D in collaborative projects or contract situations and if they are not asked to be involved in any projects there is no choice available in practice. Even in these situations, project evaluation is paramount to grasp what might be expected from pursuing each opportunity.
With the apparent increase in networking, companies could move from one collaborative project to another as opportunities arise. Project evaluation in such situations actually means strategic direction (deciding which projects to accept). However accepting a project which is essentially a contract or order is quite different from selecting projects in which the company is making the financial investment. Companies are less likely to decline project opportunities and this could imply a deviation from the preferred strategy of the company. Even in these cases, project evaluation techniques can and should be used to assess the value and risk of those opportunities, in order to know whether the company's resources could be better used for other purposes.
Nevertheless, all these different situations and contexts can have a specific answer within project evaluation techniques. The answer can be either to use different techniques for different situations, or, better, to introduce variations within the same technique (eg by using different inputs or different weighting depending on the context).

Specific techniques

Project evaluation methods have evolved in response to changing needs, although 'old' techniques are still in use today. The earlier methods were based on financial assessment, and even now this forms the back-bone of most practical methods.
One basic classification of all potential techniques might be:

• Techniques mainly or uniquely based on a financial assessment.
• Techniques mainly based on human judgment.
• Learning techniques, which explicitly take account of past experience in order to improve future decisions.

Most of the techniques in practical use by industry incorporate a mixture of financial assessment and human judgment. A more detailed list of types of techniques is shown in table 2.

Table 2
Type of Project Evaluation techniques

Techniques	Short description
Financial ratio methods	Among the longest established, easily-applied methods Criticised as of limited accuracy The key is the ratio (financial benefit) /(cost) in which the estimations of benefits should be agreed by marketing
Cash flow analysis	Requires the estimation of cash outflows and inflows It can be sofhisticated by considering discounting factors
Score index methods	They generalize the simple Ratio Analysis by considering the probability for technical and market success The estimations of probability are usually made by experts Some of these methods include discount factors: some of the measures are Internal Rate of Return (IRR) and Return of Investment (ROI)
Mathematical methods	They are based on the optimisation of allocation of R&D resources through mathematical programming The success of the methods depends strongly on how well the benefit is understood and how well the input data is converted into variables The algorithms tend to be customised and they can incorporate experience through expert systems
Matrix methods	They employ subjective considerations for proper measurement of management information Matrix methods use correlation techniques in order to identify relationships that constitute the basis for decision-making
Check-lists	Method that includes the reminders of the factors which are important in decision-making Simple and rapid way to assess a project with little effort Can be considered as starting point for more sophisticated methods as SWOT analysis
Relevance and decision trees	It is an approach for structured thinking It requires a very clear objective or long term goal, establishing a clear differentiation between goals and means for achieving them Critical path analysis and decision trees are examples of these methods
Multicriteria & table methods	Scoring procedures to incorporate judgments based on a number of criteria Various criteria may be used such as economic and financial factors and concepts or decision theory The scoring of criteria is usually complemented with the use of weight factors in order do distinguish the importance of each criteria
QFD	It is used in many fields of design and engineering It is based on the identification of customer requirements and the means for achieving those requirements Includes a scoring procedure with weighting of the factors
Experience based methods	They are based on the analysis of conditions that are usually related to the success or failure of a project (quality of execution, synergies, etc.) Success or failure is predicted according to the answers to questions on those mentioned factors The inputs for those factors should come from members in different departments
Vision	The vision is that of an individual (a Chief Executive or a product champion) defying conventional wisdom and bringing about a breakthrough It is common when information is scarce and it can be sustained by irrational methods When it works it has many virtues: speedy, incisive and changing the scene

Many techniques used today are totally or partially software based, which have some additional benefits in automating the process. In any case, the most important issue, for any method, is the managers' interpretation of the direct outcomes.

There is no best technique. The extent to which different techniques for project evaluation can be used will depend upon the nature of the project, the information availability, the company's culture and several other factors. This is clear from the variety of techniques which are theoretically available and the extent to which they have been used in practice. In any case, no matter which technique is selected by a company, it should be implemented, and probably adapted, according to the particular needs of that company.

Checklist

A checklist is a reminder of the factors (a list of factors) which are important in making a decision. Most useful criteria for evaluating any type of research or development project are essentially independent of the business field and the business strategy. These criteria include technical and commercial details, research and development realities, legal and financial factors, company targets and company strategy, etc.
The requirements for the use of this technique are minimal, and the effort involved in using it is normally low. Another advantage of the technique is that it is very easily adaptable to the company's way of doing things. However, checklist can be a starting point for more sophisticated methods where the basic information can be used for better focus. One simple and useful example is a SWOT analysis, where projects are assessed for their Strengths, Weaknesses, Opportunities and Threats.
Therefore, this technique can be developed further and the analysis interaction and feedback can be easily managed using simple information technology. Different ways to sophisticate the technique might be:

• To include some quantitative factors among the whole list of factors.
• To assign different weights to different factors.
• To develop a systematic way of arriving to an overall opinion on the project.

A simple checklist could be one made up of a lists of factors which have been formed to affect the success of a project and which need to be considered at the outset. In the evaluation procedure a project is evaluated against each of these factors using a linear scale, usually 1 to 5 or 1 to 10 (see figure 2). The factors can be weighted to indicate their relative importance to the organisation.

Figure 2
Example of how to use a checklist

A value in this technique lies in its simplicity but by the appropriate choice of factors it is possible to ensure that the questions address, and are answered by, all functional areas. When used effectively this guarantees a useful discussion, an identification and clarification of areas of disagreement and a stronger commitment, by all involved, to the ultimate outcome.

Checklist example

Table 3 shows an example of a checklist, developed by the Industrial Research Institute, that, in princpiple, could be applied to any type of R&D activities: research, product development and process development.

Table 3
List of potential factors for project evaluation

Corporate Objectives	Fits into the overall objectives and strategy Corporate image
Marketing and Distribution	Size of potential market Capability to market product Market trend and growth Customer acceptance Relationship with existing markets Market share Market risk during development period Pricing trend, proprietary problem, etc. Complete product line Quality improvement Timing of introduction of new product Expected product sales life
Manufacturing	Cost savings Capability of manufacturing product Facility and equipment requirements Availability of raw material Manufacturing safety
Research and development	Likelihood of technical success Cost Development time Capability of available skills Availability of R&D resources Availability of R&D facilities Patent status Compatibility with other projects
Regulatory and legal Factors	Potential product liability Regulatory clearance
Financial	Profitability Capital investment required Annual (or unit) cost Rate of return on investment Unit price Payout period Utilization of assets, cost reduction and cash-flow

Using the list of table 3 as a reference, any company should be able to develop its own checklist. This adaptation could take several forms:

• By sophisticating the checklist as suggested above.
• By choosing part of or adding different factors that better suit the company and its environment. For example, if the company strongly relies on external resources, either from other companies or from technological infrastructures, either for the development or for the production activities, this should probably be reflected in the list.

Cash flow analysis

In its simplest form this approach requires the completion of a standard form which asks for estimates of the expected cash outflows and inflows for the project. This can be done on a yearly basis for longer term projects or on a shorter time scale for shorter term projects, even down to weekly.

Table 4
Cash outflows and inflows

	Cash Outflow	Cash Inflow	Net Cash Flow
1997	C0	B0	B1-C1
1998	C1	B1	B2-C2
1999	C2	B2	B3-C3
2000	C3	B3	B4-C4

When portrayed as a cash flow diagram a typical project might look as shown in figure 3.

Figure 3
Diagram to plot the evolution of cash flow over time

A frequently used form of analysis applied to this data is to calculate the break even point. This is the point at which the cumulative net cash flow is equal to zero and hence the cash inflow has covered all the cash outflows (see figure 4).

Figure 4
Break even point

The reason for this measure being seen as important is that the shorter the time scale to break-even, or payback, the less risk there is that the environment will change dramatically and hence seriously affect the estimates used in the cash flow projections. However, the analysis completely ignores the likely returns after the break even point and therefore is not really a good indicator of the real potential of a project. In some cases, people choose to ignore the time value of money, although it is not difficult to handle this by including cost of capital payments on the net cash outflows as part of the costs.
An easier way to do this, however, and one commonly encountered is to use the discounted cash flow approach. Here the cost of capital is incorporated directly into the calculation in a way which also takes into account the actual year of expenditure. The result is a figure which represents the present value of both the cost and benefit stream and ultimately a net present value which is the difference between the two. For example:

A net present value greater than zero therefore indicates that a project will produce a surplus after all costs are paid and is therefore likely to be worth undertaking. It is also possible to calculate a Benefit to Cost ratio which can provide another indication of value.
In some cases it may not be easy to identify the true cost of capital and at the same time some people prefer to think in terms of rate of return on investment (ROI). In such circumstances it is not difficult to identify what has been termed the internal rate of return which is calculated by setting PVB = PVc and solving the resulting equation for i. This can be done very simply, as can the NPV calculation, using widely available computer programmes.

Decision analysis

There is inevitably uncertainty surrounding the information which is used in any evaluation exercise. The extent of this will depend upon the type of project and the environment in which the organization operates. One way of incorporating this into the evaluation procedure is through the use of probability estimates. This can be done in a number of different ways. For example, it is possible to adjust the calculations made by other techniques using estimates of the probability of commercial success and/or of technical success to create a rank index as follows

Rank Index = Pt PB (B-C)

The potential variability in costs and benefits is very likely to be influenced by the time to completion and by the competitive environment. It is possible to take this into account using a simple 3 estimate approach. This requires that people are prepared to consider pessimistic and optimistic values as well as the most likely. This approach has been used in the planning of highly complex technical projects as is described in the project planning section.
However these methods tend to ignore the multi stage process which most projects go through. A useful way of illustrating this is through the use of the decision tree approach. Figure 5 clearly illustrates that it is possible to stop a project at intermediate stages if progress is not up to expectations. In this case there are few stages and following each one there is an estimate showing the probability of success (s) or of failure (f).

Figure 5
Example of a decision tree

Watch out for

Typical problems that might arise in the implementation and use of project evaluation are as follows:

• Thinking that subjective estimates are exact representations of future outcomes.
• People who are not committed to the process and who provide information without due thought to its likely accuracy and the effect of this on the selection decision.
• Unnecessary change of goals and resource conflicts with other projects which will lead to an inability to achieve the desired outcomes.
• The technique becoming a routine that the project has to suffer, being not applied with the intensity and effort required. Furthermore, any technique needs to be applied rigorously to avoid that those with a long experience in dealing with it can learn how to 'cheat' it.
• Changes occurring in the company context should have an impact in the application of project evaluation. Although there might be a learning process involved in order to master the technique, hence requiring it is applied consistently over a period of time, at the same time it needs to continuosly adapt itself to every new situation.

Current UK Cheque Clearing Process

Introduction

The process and timescales for processing cheques is a legacy from the times when banks did not have computers. It is essentially determined by how long it takes to move pieces of paper around the country (in the old days by trains, nowadays by motorcycle couriers and vans).

The process is illustrated below based on the example of a person called Hero paying a cheque into their own bank (Clearing Bank A) on day T but drawn on another Clearing Bank B.

In the Hero example, later on, the cheque bounces at Clearing Bank B and is returned for lack of funds but how that works is described in a later diagram. The key stages are described in sequence.

Normal Cheque Clearing Process

Out Clearing

Our hero pays in the cheque and credit slip in a branch of his bank, Clearing Bank A. This cheque with all the other cheques deposited at the branch is couriered to a regional centre. In these regional centres the out-clearing is carried out. It essentially consists of the following tasks:

1. Electronically reading the amount of the cheque by using Image Character Recording (ICR) technology.
2. Electronically reading the sort code account number and cheque number from the bottom of the cheque using Magnetic Ink Recognition (MICR) technology or ICR Technology. (This line of information at the bottom of the cheque is called the code line).
3. Sorting the cheques into piles corresponding to each clearing bank (using the sort codes read to identify the clearing bank). Thus at the end of the process there should be a pile for Barclays, one for HSBC, one for Lloyds TSB and so on.
4. From the electronically read amount information and the electronic code line information electronic files of cheque payment records are created for each clearing bank. These are called IBDE (Inter Bank Data Exchange) files.
5. The paper credit corresponding to the cheque is also converted into an electronic accounting entry by similar ICR/OCR technology and is put into an electronic file of credits for uses in Clearing Bank A’s internal accounting.

Clearing Bank A Accounting

Clearing Bank A feeds the electronic credit record into its accounting systems (usually overnight). The bank will give customer access to the funds for interest and/or withdrawal purposes according to its own rules, credit policies and credit assessment of the person paying the money in. For an established customer with a good credit history they may give value and withdrawal for interest from the first day. For new account holders or customers they consider high risk they may give access to the funds for interest purposes from day T but not allow the customer to withdraw funds until four days later; when they are more certain the cheque will not bounce. In our case, Hero is credited with the value of the cheque in time for the morning of day T+1.

Exchange

Clearing Bank A sends all its piles of cheques drawn on other banks in a van to the Central Exchange near Milton Keynes. There, the piles of cheques are given to vans from the other banks. They also give Clearing Bank A piles of cheques that have been paid in at their branches drawn on Clearing Bank A. We are now interested in Clearing Bank B’s van which has collected Hero’s cheque in a pile from Clearing Bank A at the Exchange Centre and this now returns to the In-Clearing Centre at Clearing Bank B.

In parallel with the physical exchange of cheques is an electronic exchange of files of payments in the form of IBDE files. These are transmitted over secure network connection from each clearing bank to another on a Bilateral basis.

Both the physical and electronic records have been exchanged by 11:00 am on the morning of Day T+1.

In-Clearing

The physical cheques are received from the Exchange Centre at Clearing Bank B. These cheques are processed with three* aims in mind (Some banks make electronic image copies of the cheques here as well but this does not change the basic process.):

1. First the code lines are read (for sort code, account number and cheque number). This is used to verify the records in the IBDE file of electronic payments.
2. Second the cheques are sorted into sort code and account number order for potential retrieval in case of queries/returns.
3. The cheques for Agency Banks are sorted into seperate piles for onward deliveries to those banks.

Once the file of incoming cheques has been verified against the IBDE file of incoming cheques the electronic file of payments is passed onto the accounting (usually overnight) of Clearing Bank B on the night of T+1.

The overnight accounting provisionally debits the account with what is called an AM entry; effectively earmarking the funds.

Pay/No Pay

Clearing Bank B now spends a considerable part of day T+2 deciding whether to pay or not the cheques that have been drawn on its customers’ accounts. These decisions are a mixture of computer based and human based decisions. They fall into two categories.

1. Account Related – if the account has insufficient funds to cover the amount of the cheque the overnight accounting will highlight the account as being in excess. Credit assessment systems then kick in on the account and for many customers will decide whether to honour the cheque or bounce it (in all cases the bank will charge fees but some accounts may be deemed credit worthy by the computer and hence allowed to go overdrawn). For some classes of customer such as large corporates or high net worth individuals where the customer relationship is very important banking officers will make the decision to pay or not. Other account based reasons for returning the cheque might be that the account has been closed or the customer has deceased.
2. Cheque Related – there are also a range of Fraud and Technical reasons why the cheque should be returned. Banks run a number of tests such as testing the cheques are on special bank issued paper or that the signature on the cheque is a good match with their record of the customer’s signature to ensure the cheque is bona fide. They also run “profiling” tests which use statistical techniques to highlight unusual payments (e.g. unusually large, unusually frequent, etc.) to seek out potential frauds. Customers can ask to have cheques stopped so the bank runs a comparison of cheques to be processed against lists of stopped cheques with a view to returning such items that match. They also test to ensure words and figures match and that the date on the cheque is okay. If they discover problems with any of this they can return the cheque unpaid.

In our hypothetical case, the person who paid Hero has insufficient funds on his account so the bank decides to return the cheque to Hero. If the account had had enough money the clearing cycle would have stopped here. The next steps are illustrated by dotted lines in the diagram below.

Returning of Bounced Cheques

Unpaids Out

Clearing Bank B, towards the end of T+2, having decided that the cheque paid to Hero is to be returned, has to physically locate it among the thousands of cheques processed. A sorting process takes place creating piles of unpaid cheques, one for each of the other clearing banks. These piles are then put in a van to go to Central Exchange to be returned to the other clearing banks.

Some banks do not use this “Centralised Unpaids Out” model but rather make the pay/no pay decisions in branches and sort out the cheques to be unpaid in the branches as well. In these cases the branch returning the cheques posts them to Clearing Bank A by first class mail.

Unpaids In

Whether the cheque is returned via the Central Exchange or via post it is handled as part of “Unpaids In” at Clearing Bank A on day T+3. Clearing Bank A reads the code line of the returned cheques and uses the sort code, account number and cheque numbers as a key to identify the account that received the credit for the cheque amount. Once identified, the account is debited on the night of T+3 for the amount of the cheque, thus reversing the credit posted a few days earlier.

Conclusion

The above paragraphs form a high level description of the cheque clearing process which is a small industry in its own right. Aspects that have not been covered are:

1. The credit clearing process (e.g. where someone pays a credit slip for Clearing Bank B in at Bank A). This is similar to the cheque clearing process but there are no IBDE files.
2. The variations for the Northern Irish Banks and the Scottish Banks (extra days are incurred through logistics and lack of IBDE files).
3. The Research and Adjustments processes, these are processes based around control totals for batches of cheques tallying right across the system – if they don’t someone has to find the error, usually the misreading of a value off a cheque somewhere in the system and correcting the error (an “adjustment”).
4. The interbank settlement process of the Bank of England and associated interbank reconciliations.