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Chapter 9 Cash Collection Systems

Chapter 9 Cash Collection Systems. The Cash Flow Timeline. Order Order Sale Payment Sent Cash Placed Received Received Accounts Collection

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Chapter 9 Cash Collection Systems

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  1. Chapter 9Cash Collection Systems

  2. The Cash Flow Timeline • Order Order Sale Payment Sent Cash • Placed Received Received • Accounts Collection • < Inventory > < Receivable > < Float > • Time ==> • Accounts Disbursement • < Payable > < Float > • Invoice Received Payment Sent Cash Disbursed

  3. 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.

  4. The Cash Flow Timeline for Collection Float • Check Check Check Good Funds • Mailed Received Deposited Received • Time => • Mail Processing Availability • Float Float Float • Collection Float

  5. Cost of Float • Remittances x Collection Float = Dollar-Day Float • $ 50,000 2 $ 100,000 • 1,200,000 5 6,000,000 • 500,000 7 3,500,000 • 1,000 10 10,000 • ------------- ------------- • $1,751,000 $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

  6. Types of Collection Systems • Company processing centers • Lockbox systems

  7. Company Processing Centers • Decentralized collection systems • Centralized collection systems

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

  9. Alternative Collection Systems • Preauthorized payments • Electronic corporate trade payments

  10. Lockbox Location Study • Customer groups • Remittance sample • Mail availability schedule

  11. The Lockbox Model • Complete enumeration • Other techniques

  12. Lockbox Bank Selection • Consortiums • Multiple processing centers • Movement toward nationwide branching

  13. 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.

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