Introduction to Corporate Finance

ONLINE CHAPTERS

account analysis will receive some credit for the transaction balances they leave in the account, and

typically the credit will only partially offset the service fees. The balance of fees owed the bank will then

be deducted as a service charge for the month in question.

Why might companies use cash

at all for any of their payments?
1 What is float? What are its four components? What is the difference between availability float and
clearing float?

2 What activities are involved in cash position management? How does the cash manager monitor

and take actions with regard to the end-of-day cheque account balances?

3 How do smaller companies that do not engage in cash position management typically set their

target cash balance? What is typically detailed in a bank account analysis statement?

CONCEPT REVIEW QUESTIONS 19-1

19-2 COLLECTIONS

The primary objective of the collections process is to collect funds quickly and efficiently from customers

and others. This process includes gathering and disseminating information related to the collections, and

in some cases the information may be as important as the money itself. One key requirement is ensuring

that the accounts receivable department has the remittance information needed to post receipts properly

and update customer files. A secondary requirement is to provide audit trails for the company’s internal

and external auditors.

As discussed previously, a major delay in the collections process results from collection float, which is

a function of the mail, processing and availability floats. The primary goal of collections is to reduce each

of these float components as much as possible. Collection float is typically measured in dollar-days, or the

number of dollars in the collection process multiplied by the number of days of float. For example, $10

million of cheques with an average of five days of float would represent $50 million dollar-days of float.

19-2a TYPES OF COLLECTION SYSTEMS

A company’s collection system is primarily determined by the nature of its business. Many high-volume

retail establishments, such as fast-food restaurants or convenience stores, receive the bulk of their

payments in cash. Other types of retail operations, such as department and variety stores, collect most of

their payments by credit card, debit card or cheque.

What can complicate the payment collection process is that one payment is often used to pay multiple

invoices, and there may be adjustments or partial payments related to those invoices. For example,

a single payment to a consulting firm for project work completed must then be split across several

subcontractors and suppliers of materials. This makes the information collected by the cash manager of

critical importance to the accounts receivable department. Collection systems must take into account

the information management requirements related to the payment application process.

Some types of time-critical transactions, such as real-estate closings or high-dollar payments, may be

received via wire transfers with same-day value. Other forms of high-volume, low-dollar receipts, especially

LO19.2

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