Chapter 9 Cash Collection Systems Copyright 2002 by

Chapter 9 Cash Collection Systems Copyright 2002 by South-Western, a division of Thomson Learning TM

The Cash Flow Timeline Order Placed Order Received Sale Cash Received Accounts Collection < Inventory > < Receivable > < Float > Accounts < Payable > Invoice Received Disbursement < Float > Payment Sent Time ==> Cash Paid Copyright 2002 by South-Western, a division of Thomson Learning TM

Learning Objectives v To understand the various options firms have to collect customer payments v To differentiate between the various collection system and choose that system best suited for the company v To collect the basic data necessary for a lockbox study v To understand how a lockbox model works Copyright 2002 by South-Western, a division of Thomson Learning TM

The Cash Flow Timeline for Collection Float Check Mailed Check Received Check Deposited Good Funds Received Time => Mail Float Processing Float Availability Float Collection Float Copyright 2002 by South-Western, a division of Thomson Learning TM

Cost of Float Remittances $ 50, 000 1, 200, 000 500, 000 1, 000 ------$1, 751, 000 x Collection Float 2 5 7 10 = Dollar-Day Float $ 100, 000 6, 000 3, 500, 000 10, 000 ------$9, 610, 000 Average Dollar-Day Float = Dollar-Day Float/Days in month Average Collection Float = Dollar-Day Float/ Remittances Annual Cost of Float = Average Dollar-Day Float x Rate Copyright 2002 by South-Western, a division of Thomson Learning TM

Types of Collection Systems v Company processing centers v Lockbox systems Copyright 2002 by South-Western, a division of Thomson Learning TM

Company Processing Centers v Decentralized collection systems v Centralized collection systems Copyright 2002 by South-Western, a division of Thomson Learning TM

Lockbox Systems v Retail v Wholesale v Cost Factors, Eq 9. 1 TC = N x ((F x D x i) + VC) + FC Copyright 2002 by South-Western, a division of Thomson Learning TM

Alternative Collection Systems v Preauthorized payments v Electronic corporate trade payments Copyright 2002 by South-Western, a division of Thomson Learning TM

Lockbox Location Study v Customer groups v Remittance sample v Mail availability schedule Copyright 2002 by South-Western, a division of Thomson Learning TM

The Lockbox Model v Complete enumeration v Other techniques Copyright 2002 by South-Western, a division of Thomson Learning TM

Lockbox Bank Selection v Consortiums v Multiple processing centers v Movement toward nationwide branching Copyright 2002 by South-Western, a division of Thomson Learning TM

Summary v Once customer has initiated payment, the financial manager must have an efficient process to convert the payment medium into cash v Two systems were analyzed: company processing centers and lockbox systems v A lockbox system can be designed to collect retail payments or wholesale payments v A cost equation was developed and a lockbox model developed to optimize the collection system v The chapter concluded by demonstrating many of the principles discussed through the use of a case study Copyright 2002 by South-Western, a division of Thomson Learning TM