19: Cash, Payables and Liquidity ManagementAlthough large companies whose customers are geographically dispersed commonly use a lockbox
system, small companies may also find a lockbox system advantageous. The benefit to small companies
often comes primarily from transferring the processing of payments to the bank.
Lockboxes are typically classified as either retail or wholesale. A retail lockbox uses standardised,
scannable remittance documents in order to highly automate the processing of incoming payments.
These types of systems are characterised by high volumes of low-dollar payments, and the key issue is
processing the payments at a minimum cost per dollar collected. Given the low-dollar amounts of these
payments, availability float is generally not a big issue.
Wholesale lockboxes, such as those provided by HSBC in Australia, primarily process high-dollar
payments with non-standard remittance information. The key issues in this type of system are: (1)
reducing the availability float related to the large cheques; and (2) quickly forwarding the remittance
information to the accounts receivable (A/R) department for application of payment. The current practice
for wholesale lockboxes is to make extensive use of imaging technology to relay, quickly and accurately,
copies of the remittance information back to the A/R department.
LO 19.319-2c CASH CONCENTRATION
In the previous section, lockbox systems were discussed as a means to reduce collection float. With
a lockbox system, the company has deposits in each lockbox bank. Cash concentration is the process of
bringing the lockbox and other deposits together into one bank, commonly called the concentration bank.
Cash concentration has three main advantages. First, it creates a large pool of funds for use in
making short-term cash investments. Because there is a fixed-cost component in the transaction cost
associated with making marketable security investments, investing a single pool of funds reduces the
company’s transaction costs. The larger investment pool also allows the company to choose from a larger
variety of marketable securities. Second, concentrating the company’s cash in one account improves the
tracking and internal control of that cash. Third, having one concentration bank allows the company to
implement more effective payment strategies that preserve its invested balances for as long as possible.
As bank branch networks continue to expand, more and more companies are choosing banks with large
geographic coverage that can simplify concentration by using deposit reconciliation services.
The configuration of a company’s cash concentration system is generally a function of the collection
system. For example, a company with several collection centres or lockboxes will typically use wire
transfers to quickly move large balances from a limited number of collection points into its concentration
account. The type of disbursement system (discussed in a later section) is also an important consideration,
because these accounts must be funded either by internal transfer or wire transfer.19-2d FUNDS TRANSFER MECHANISMS
There are two commonly used mechanisms for transferring cash from the depository banks to the
concentration bank: automated clearinghouse debit transfers and wire transfers.Automated Clearinghouse Debit Transfers
The first mechanism is an automated clearinghouse (ACH) debit transfer, which is a pre-authorised electronic
withdrawal from the payer’s account, and is generally known within the cash management field as an
electronic depository transfer (EDT).LO19.3
cash concentration
The process of bringing the
lockbox and other deposits
together into one bank, often
called the concentration bankWhat are some of the
advantages to a company
of using cash concentration
procedures?automated clearinghouse
(ACH) debit transfer
A pre-authorised electronic
withdrawal from the payer’s
account
electronic depository
transfer (EDT)
The term used in the cash
management trade for an
automated clearinghouse
(ACH) debit transferthinking cap
question