Cash Management and Marketable Securities^207
Concentrating Banking
Many firms need only a single bank account. Larger firms that operate over wide
geographical areas usually need more than one, sometimes dozens. Where many
accounts are needed, concentration accounts can be used to minimise the total
requirement for working balances. Suppose a company has a number of branch offices,
each with a local bank account. Branches collect accounts receivable and make deposits
in their local accounts. Each days, funds above a certain predetermined minimum are
transferred to a central concentration account, usually at the firmís headquarters. The
daily transfer of funds can be made either by a depository transfer check or by wire
transfer; the latter is faster but more expensive.
The funds transferred to the concentration account are available for disbursement for
other purpose. As we will see later, the more variable a firmís cash flows, the higher
the requirement for working cash balances.
By pooling its funds for disbursement in single account, the aggregate requirement for
working balances is lower than it would be if balances were maintained at each branch
office. Concentration in short, permits the firm to ìstoreî its cash more efficiently.
Speeding Collections
Another means of conserving cash is to reduce the lag between the time the customer
mails the cheque and the time the funds become collected, that is, from points F to J of
the 6 days lag, 2 days are due to mail time, 2 days are due to processing time within
XYZ Corporation, and 2 days are due to collection time within bank. We will have more
to say later about collection within the banking system. Let us now focus on the 4 days
lag from F to H.
Small firms that operate in limited geographical areas often can do little to reduce mail
time. However, improvements often can be made in processing time within the firm.
Suppose XYZ Corporation has credit sales of Rs 5 crore per year. With approximately
250 working days per year, XYZís collections average Rs 20,000 per working day. If
XYZ could reduce it by Rs 20,000, (XYZís borrowing cost was 9 per cent) saving of
about Rs 1,800 per year would be realised. These potential saving could be compared
to the cost of faster processing to determine whether the change in processing should
be made. We can conclude that internal processing should be speeded up to the point at
which the costs of further improvement exceed the savings.
A second step that may be advantageous is to establish a lock-box system, which often
can reduce mail and processing time still further. The firm first establishes a number of
collection points, taking account of customer locations and mail schedules. At each
location, the firm rents a post office box and instruments its customers to remit to the