Cash Collection Systems STCM Chapter 9 ECM Chapter 6

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Cash Collection Systems STCM Chapter 9ECM
Chapter 6
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The Cash Flow Timeline
Order Order Sale
Cash Placed Received
Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float
gt

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Paid
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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
Objectives of a Collection System

• Mobilize Funds
• Accessing Information
• Updating Accounts Receivable
• Providing Audit Trails

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Collection Float Components

• Mail Float
• Processing Float
• Availability Float

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The Cash Flow Timeline for Collection Float
Check Check Check Good
Funds Mailed Received Deposited
Received

Time gt Mail Processing
Availability Float Float
Float Collection Float
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Collection Float Measurements

• Average Daily Float
• Average Daily Receipts
• Average Delay
• Annual Cost of Float

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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 -
320,333 Average Collection Float Dollar-Day
Float/ Remittances 5.49 days Annual Cost of
Float Average Dollar-Day Float x Rate - 16,016
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Considerations in Selecting a Collection System

• Commonly used payment practices.
• Nature of the payment system.
• Nature of the business.
• Characteristic of the payment instrument used.
• Cost of float and system administration.
• Differences between wholesale and retail
  businesses.

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Types of Collection Methods

• Over-the-Counter/Field Deposits
• Mail
• Electronic (ACH or wire transfers)

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Over-the-Counter SystemCriteria to Select
Deposit or Collection Banks

• Location of the bank for convenience and security
  reasons.
• Banks with branches to reduce administration and
  cash concentration costs.
• Means of compensation.
• Benefits for processing of check deposits and
  cash processing.

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Types of Collection Systems

• Company processing centers
• Lockbox systems
• Choice depends on volume of checks processed and
  the amount of the checks

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Company Processing Centers

• Decentralized collection systems
• Centralized collection systems

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Electronic Systems

• Home Banking
• Telephone Payment
• Internet Payment
• Wire Transfers
• ACH Business-to-Business
• Preauthorized Payments

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Lockbox Systems

• Retail
• Wholesale
• Wholetail

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Wholesale Lockbox Features

• Small to moderate volume of large-dollar
  remittances.
• Objective is to minimize collection float and to
  provide timely and accurate information on
  payments.
• Involves manual and labor intensive processing.
• Payments are made for specific invoices and one
  payment can cover different invoices.

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Retail Lockbox Features

• Large volume of small-dollar remittances.
• Objective is to minimize processing costs.
• Highly automated operation.
• A standard remittance advice (return document)
  accompanies payments.
• Information on the return documents and checks
  are captured and data is transmitted
  electronically to update A/R.

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Site Selection Criteria

• Locations with faster availability.
• Locations with mail centers.
• Locations close to high concentration of
  customers.
• Service quality of processors.

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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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Collection Studies

• Determine number and location of collection
  points and assign payors to these points to
  minimize float.
• Studies should also include an analysis of
  processing costs.
• Mail time studies provide input for the selection
  of sites.

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Lockbox Bank Selection

• Consortiums
• Multiple processing centers
• Movement toward nationwide branching

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Lockbox Service Features

• Mail Time Performance
• Unique Zip Codes
• Deposit Deadlines
• Availability Schedules and Availability
  Adjustments
• Ledger Cutoff Time and Total Collection Time

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Alternative Collection Systems

• Credit/Debit /Smart Cards
• ATM Machines
• Bill Paying Services

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Other Settlement Systems

• Net Settlement Systems
• Credit Cards
• Debit Cards
• Automatic Teller Machines (ATMs)
• Telephone Banking
• Bill Paying Services
• Home Banking
• Agents
• Smart Cards

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Cash Concentration STCMChapter 10ECM Chapter 7
Order Order Sale
Cash Placed Received
Received

Accounts Collection lt
Inventory gt lt Receivable gt lt Float
gt

Time gt Accounts Disbursement
lt Payable gt lt
Float gt Invoice
Payment Cash
Received Sent
Paid
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Learning Objectives

• To understand the need for a cash concentration
  system
• To formulate a cash transfer decision model
• To understand the advantages and disadvantages of
  the different cash transfer tools

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Cash Concentration

• Is the movement of funds from outlying depository
  locations to a central bank account where funds
  can be managed efficiently.

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Objectives of Cash Concentration

• Simplify Cash Management
• Improved Controls
• Pool Funds
• Minimize Excess Balances
• Reduce Transfer Expenses

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Exhibit 10.1
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Concentration System Considerations

• Collection System
• Disbursement System
• Funds Transfer Alternatives
• Banking Network

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Over-the-Counter Collection SystemConcentration
System Considerations

• Multiple Banks
• Local Banks
• Limited Need for Daily Deposit and Balance
  Information
• Local Deposits

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Lockbox Collection SystemConcentration System
Considerations

• Relatively Few Banks
• Regional and Money Center Banks and Third Party
  Processors
• Corporate Services
• Deposit Availability

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Electronic Collection SystemConcentration
System Considerations

• No Mail Float
• Bank Location Unimportant
• Few Banks

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Disbursement SystemsConcentration System
Considerations

• Centralized Check Issuance
• Decentralized Check Issuance
• Efficient concentration system is important with
  centralized check issuance.

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Cash Transfer Tools

• ACH
• Wire transfer

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Initiation of the Transfer

• Decentralized
• Centralized

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System Costs

• Opportunity cost of idle balances
• Transfer costs
• Administrative costs

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Benefits of the System

• Economies of scale
• Enhanced visibility and control of balances
• Dual balance possibilities

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The Cash Flow Timeline
T1
T2 T3 T4
T5 T6
Debit field bank
account
Balance available at the
concentration bank
Transfer initiated
Collected funds at the field bank
Deposit reported
Original deposit at field bank
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Cash Transfer Scheduling

• Complicating factors
• Objective minimize transfer costs
• Transfer rules

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Complicating Factors

• Minimum transfer balance
• Fluctuating daily deposits
• Deposits with different availabilities
• Availability of deposits vs clearing of transfer
  instrument
• Weekends

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Transfer Rules

• Daily transfer transfer the daily deposit
• Managing about a target
• one-time transfer out to earn interest
• reduces the number of transfers
• Anticipation initiate transfer prior to deposit

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Anticipation

• Is the initiation of a transfer before cash
  becomes available at the deposit bank
• Availability Anticipation is based on ledger
  balances.
• Deposit Anticipation is based on expect deposits.
  Requires a good forecasting system.

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Reducing Transfer Cost Transfer
MechanismsTarget and Threshold Concentration

• Target Concentration-transfer all funds above set
  target.
• Threshold Concentration-transfer funds only after
  funds have built up to a predetermined level.
• Target concentration may involve daily transfers.
• Threshold concentration helps minimize number of
  transfers.