Cash Management Essentials

1
Collections
2
Strategize

• The objectives of a corporate collection system
• The components of collection float
• The differences among over-the-counter, mail and
  electronic collection methods and how to choose
  the appropriate system
• The three different types of lockboxes and issues
  involved with lockbox selection

3
Strategize

• Learn to calculate the following
• Average daily float
• Average daily receipts
• Average delay
• Annual cost of float
• A lockbox cost/benefit analysis

4
Collection System Objectives

• Mobilize funds
• Access daily deposit information
• Update accounts receivable (cash application)
• Support audit trails

5
Collection Float ComponentsExhibit 6.1 Page 142

• Mail Float
• Processing Float
• Availability Float

6
Typical Collection Process
Invoice Sent to Customer
7
Describe five considerations a company must take
into account in designing a collection system.
(pp. 143-146)

• 1. Commonly accepted payment practices
• 2. Structure of the payments system
• 3. Nature of the companys business (wholesale
  vs. retail)
• 4. Characteristics of the payment instrument used
• 5. Cost of float and system administration

8
Collection System Considerations

• Payment Practices
• Payment Systems
• Nature of the Business
• Payment Instruments Characteristics

9
Collection System Considerations

• Payment Practices
• Checks are the most frequently used payment
  instrument for both corporate and consumer bill
  paying
• Electronic payments dollar amounts are much
  larger and the number of electronic transactions
  are growing

10
Collection System Considerations

• Payment System - Three features that distinguish
  the U.S. payment system from that of most other
  countries are
• Checks are used in most payments. Large cash
  transactions are rare
• Large number of banks and financial institutions
• No true nationwide banks

11
Collection System Considerations Nature of
Business

• Describe five aspects of a companys business
  that impact the collection system it uses. (p.145)

1. High transaction volume retail operations
(fast food store) receive virtually all of their
payments in cash 2. Certain types of retail
operations such as department or clothing stores
collect a large portion of their payments by
credit card and checks 3. Time critical
transactions (such as securities settlements or
real estate closings) may require a wire-transfer
with same day value
12
Collection System Considerations Nature of
Business

• 4. In a business-to-business (B2B) environment, a
  check received as payment is usually accompanied
  by remittance information about invoices paid,
  partial payments, discounts and deductions
• 5. As the use of the Internet expands, more
  companies are implementing electronic bill
  presentment and payment (EBPP) or using Web-based
  collection applications

13
Collection System Considerations Payment
Systems and Instruments

• Payment instruments
• Cash
• Checks
• Credit card, debit card, smart card
• ACH debit or credit
• Wire transfer
• Intermediaries

14
Collection System Considerations

• Float Administrative Cost Trade Off
• An optimal collection system minimizes the sum of
  float, processing, and administration cost

15
Collection Float

• The delay between the time the payor mails the
  check and the time the payee receives available
  funds
• Float components
• Mail (1 - 5 days)
• Processing (1 -3 days)
• Availability (0 - 3 days)
• International issues

16
Collection Float Measurement

• Collection Float is measured in dollar days
• Collection Float dollars x days
• Example

Collection Float Dollars x Days
1,500,000 x 4 days 6,000,000 dollar days
17
Key Collection Float Measures

• Average Daily Float
  Total Dollar Days of Float
  Total Calendar Days in Period
• Annual Cost of Float
  Average Daily Float x Opportunity Cost

18
Float Calculation Example
19
Calculate

• Average Daily Float
• Annual Cost of Float
• Assume
• 30 days in month
• Cost of funds is 9.0

33,000,000 / 30 1,100,000
1,100,000 x .09 99,000
20
Collection Systems
21
Collection Methods and Products

• Over-the-Counter / Field Deposit Systems
• Receipts collected at field locations
• Retail payments, including cash, checks, debit
  cards, credit cards, smart cards
• Wholesale payments,including procurement cards,
  checks

22
Collection Methods and Products

• Over-the-Counter / Field Deposit Systems
  (Considerations)
• Location
• Branch Banking
• Compensation
• Deposit Reconciliation Services
• Pre-Encoded Check Deposits
• Cash Processing

23
Collection Methods and Products

• Mail
• Payment sent to company or to third party lockbox
• Used for both retail and wholesale payments
• Electronic --ACH or wire transfer
• Repetitive consumer payments
• Repetitive and one-time wholesale payments

24
Collection Methods and Products

• Describe seven advantages and five disadvantages
  of a company processing center. (p. 149)

• Advantages
• Control
• Flexibility
• Customization
• Facilitation of updating
• Reduced cost
• Capability assurance
• Service quality

• Disadvantages
• Capital investment
• Sunk cost
• Lack of contingency sites
• Reduced processing efficiency
• Slower delivery

25
Mail Processing SystemsLockbox

• A collection method by which a bank or third
  party contracts to receive, process and deposit a
  companys receipts
• Wholesale (manual / semi-automatic) -- high
  dollar / low volume (business payments)
• Retail (automated) -- low dollar / high volume

26
Collection Methods and Products

• Describe five advantages and three disadvantages
  of a lockbox collection system. (p.150)

• Advantages
• Reduced float
• Mail float
• Processing float
• Availability float
• Efficient processing
• Greater control
• Uninterrupted service
• Scalability

• Disadvantages
• Reduced operational control
• Greater costs
• Harder to customize

27
Collection Methods and Products

• Electronic Systems
• Home Banking
• Telephone Initation
• Personal Computers
• Internet
• Electronic Bill Presentment and Payment (EBPP)

28
(No Transcript)
29
Types of Lockboxes

• Retail
• Consumer Payments
• High Volume
• Small Dollar Amounts
• Main Concern is Usually Processing Costs
• Automated Process
• Maintenance 192.86
• Per Item 0.14

• Wholesale
• Corporate Payments
• Low Volume
• High Dollar Amounts
• Main Concern Float
• Manual Process
• Maintenance 110.87
• Per Item 0.45

30
Describe seven characteristics of a wholesale
lockbox. (p. 152)

• 1. Process small-to-moderate numbers of
  large-dollar remittances

2. Objective is to minimize collection float
3. Provide accurate and timely information on
payments received 4. Remittances are typically
processed manually
What is the major objective?
31
Describe seven characteristics of a wholesale
lockbox. (p. 152)

• 5. Process partially paid invoices or one payment
  for several invoices
• 6. Adjust for discounts, returns and allowances
• 7. Remittance information does not generally
  conform to a standard format

32
(No Transcript)
33
Describe four characteristics of a retail
lockbox. (p. 153)

• 1. Process large volumes of retail, small-dollar
  remittances, usually from consumers

2. Minimizing processing costs is more important
than reducing collection float
3. Processing scannable, standardized remittance
advices which usually accompany checks 4. Using
automated processes and specialized equipment
34
Hybrid Lockbox

• Referred to as automated wholesale lockboxes
• B2B
• Combine features of both wholesale and retail
  lockboxes

35
Issues Pertaining to Lockbox Selection

• Float Savings
• Cost
• Fixed
• Variable
• Calculation of Net Benefit

36
Issues Pertaining to Lockbox Selection

• Collection Studies
• Mail Time Studies
• Processing Cost
• Site Selection
• Lockbox Processor Selection

37
Selecting a Lockbox Site

• Availability
• City with Fed. Branch or RCPC
• Major Postal Processing Facility
• Area Distribution Center (ADC)
• Sectional Center Facility (SCF)
• Airport Facilities
• Dont Forget Airmail Arrivals

38
How Lockbox Service Features Vary

• Mail Time Performance
• Unique ZIP codes
• Deposit Deadlines
• Availability
• Endpoint Analysis
• Ledger Cutoff Time
• Payment Media
• Different ways to access Lockbox information

39
Lockbox networks

• Lockbox networks
• Customized Services
• Payor address change updates
• Conversion of remittance data and payments to ACH
  format
• Integrated collections outsourcing
• Managing databases for clients
• Creating Web-based invoices

40
Lockbox Cost/Benefit (2) (pp. 155-157)

• The economic benefit of using a lockbox is a
  tradeoff between reducing collection float and
  paying fees to a lockbox processor over an above
  internal processing costs.
• Example
• Using the information from the previous example,
  and assuming a lockbox would reduce the float of
  each batch of categories by 1 day, the
  dollar-days of float is computed as follows

41
Lockbox Cost/Benefit (2)
42
Lockbox Cost/Benefit (2)

• Assume the following
• The annual volume of checks is 15,000
• The annual opportunity cost is 6
• The companys internal check processing cost
  is .55 per item
• The lockbox processor charges 1,200 per
  month, plus .75 per item
• Annual cost of float w/Lockbox 55,400
• Annual cost of float without/Lockbox 79,600

43
Lockbox Cost/Benefit (2)
The net dollar benefit of the lockbox can be
determined as follows
44
Image Technology

• Allows paper documents to be scanned, converted
  to a digital image and stored for subsequent
  distribution, handling, and processing
• Uses
• ICR
• OCR
• Companies can be supplied data by CD-ROM, or
  electronic format

45
Describe 9

• Describe the three types of electronic collection
  systems. (pp. 162-165)
• 1. Wire transfers
• 2. ACH business-to-business payments

3. Preauthorized payments
46
Describe three advantages and four disadvantages
of ACH business-to-business payments (for the
payee). (pp. 163)

• Disadvantages
• Need for trading partner negotiation
• Adjusting float
• Set-up costs
• Reluctance

• Advantages
• Reduced collection float
• Reduction in cost of receivables processing
• Improved forecasting

47
Describe ten types of alternative retail
collection systems. (pp. 165-168)

• Home banking
• Internet
• Agents
• Smart cards
• Cross-border collections

• Credit cards
• Debit cards
• Automated teller machine (ATM) networks
• Telephone banking
• Bill paying services