ACCELERATION OF CASH FLOW MANAGEMENT BASIC INFORMATION AND TUTORIALS

To accelerate cash inflow, the financial manager must (1) know the bank’s policy regarding fund availability; (2) know the source and location of company receipts; and (3) devise procedures for quick deposit of checks received and quick transfer of receipts in outlying accounts into the main corporate account.

The various types of check processing delays that must be analyzed are: (1) mail float—the time required for a check to move from a debtor to a creditor; (2) processing float—the time it takes for a creditor to deposit the check after receipt; and (3) deposit collection float—the time required for a check to clear.

Note: Electronic data exchange (EDI), or financial EDI (FEDI), significantly reduces or eliminates a float. EDI refers to the growing practice of direct, electronic information exchange between all types of businesses, thereby shortening the length of time required to initiate and complete a business transaction.

Mail float can be minimized by having the collection center located near the customer. Local banks should be selected to speed the receipt of funds for subsequent transfer to the central corporate account.

As an alternative, strategic post office lockboxes may be used for customer remissions. The local bank collects from these boxes periodically during the day and deposits the funds in the corporate account.

The bank also furnishes the company with a computer listing of payments received by account and a daily total. Because the lockbox system has a significant per-item cost, it is most cost-effective with low-volume, high-dollar remissions.

However, the system is becoming increasingly more available to companies with high-volume, low-dollar deposits as technological advances (such as machine-readable documents) lower the per-item cost of lock boxes.


Before a lockbox system is implemented, the company should make a cost–benefit analysis that considers the average dollar amount of checks received, the costs saved by having lock boxes, the reduction in mailing time per check, and the processing cost.