Chapter 9 Cash Collection Systems

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The Cash Flow Timeline

Order Placed

Order Received < Inventory >

Payment Sent Cash Received Accounts Collection < Receivable > < Float >

Sale

Time ==>
Accounts < Payable > Disbursement < Float >

Invoice Received

Payment Sent Cash Disbursed Copyright 2005 by Thomson Learning, Inc.

Learning Objectives
To understand the various options firms have to collect customer payments. To differentiate between the various collection system and choose that system best suited for the company. To collect the basic data necessary for a lockbox study. To understand how a lockbox model works.

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The Cash Flow Timeline for Collection Float

Check Mailed Check Received Check Deposited Good Funds Received

Time => Mail Float Processing Float Collection Float

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Availability Float

Cost of Float

Remittances $ 50,000 1,200,000 500,000 1,000 ------------$1,751,000

Collection Float 2 5 7 10

Dollar-Day Float $ 100,000 6,000,000 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
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Types of Collection Systems

Company processing centers Lockbox systems

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Company Processing Centers

Decentralized collection systems Centralized collection systems

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Lockbox Systems
Retail Wholesale Cost Factors, Eq 9.1 TC = N x ((F x D x i) + VC) + FC

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Alternative Collection Systems

Preauthorized payments Electronic corporate trade payments

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Lockbox Location Study

Customer groups Remittance sample Mail availability schedule

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The Lockbox Model

Complete enumeration Other techniques

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Lockbox Bank Selection

Consortiums Multiple processing centers Movement toward nationwide branching

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

Copyright 2005 by Thomson Learning, Inc.