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

2. Copyright  2002 by South-Western, a division of Thomson Learning TM The Cash Flow Timeline Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Invoice Payment Cash Received Sent Paid Received Sent Paid Order Order Sale Cash Placed Received Received Accounts Collection Accounts Collection Accounts Disbursement Time ==> Accounts Disbursement Time ==> Invoice Payment Cash Invoice Payment Cash Received Sent Paid Received Sent Paid

3. 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

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

5. Copyright  2002 by South-Western, a division of Thomson Learning TM Cost of Float Remittances x Collection Float = Dollar-Day Float $ 50,000 2 $ 100,000 1,200,000 5 6,000,000 1,200,000 5 6,000,000 500,000 7 3,500,000 500,000 7 3,500,000 1,000 10 10,000 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. Copyright  2002 by South-Western, a division of Thomson Learning TM Types of Collection Systems v Company processing centers v Lockbox systems

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

8. 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

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

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

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

12. 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

13. 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