Summary
December 14, 2008 – 7:06 amThe preeminent role of paper in the U.S. business system has led to the development of various internal and banking procedures to manage collections. Float cannot be eliminated so long as consumers and businesses pay by check. It is important, therefore, to implement techniques to minimize the time to “good” funds, including lockboxing and efficient post office and cashiering procedures.
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Bill and Ann reviewed their current collection system, and decided that the $120 million in annual check receipts (representing about 6,000 items) could be managed more efficiently by a bank lock-box network. With assistance from their bankers, they calculated that about three days of total float would be saved, worth $100,000 ($120 million/360 calendar days × 3 days × 10 percent cost of funds).
In addition, they would be able to close many of their bank accounts, greatly reduce administrative time, and avoid moving funds between accounts or leave idle balances in their banks. The cost of the lockbox arrangement would be about $6,000 (6,000 items × 60 cents + $200/month in account maintenance and other fixed charges). With the closing of the bank accounts and the elimination of balances and funds movement, the total savings developed were well in excess of $100,000 a year.
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