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(^208) Financial Management
box. The firmís local bank is authorised to pick up mail directly from the box. The bank
does so, perhaps several times a day and deposits the cheque in the firmís account. The
bank made a record of names and amounts and other data needed by the firm for
internal accounting purpose, and immediately enters the cheques for collections.
The lock-box system results in two benefits to the firm: First, the bank performs the
clerical tasks of handling the remittances prior to deposit, services which the bank may
be able to perform at lower cost. Second, and often more important, the process of
collection through the banking system begins immediately upon receipt of the remittance
and does not have to wait until the firm completes its processing for internal accounting
purpose. In the activity represented by HJ now takes place simultaneously with GH.
The firms processes remittances for internal accounting purpose using data supplied by
the bank and can schedule this processing at any time without delaying collection.
Using a lock-box system as much as 4 days in mailing and processing time can be
reduced.
Banks change for their services in connection with a lock-box plan either via fees or
compensating balance requirements. Whether the savings will outweigh the costs for a
particular company depends mainly on the geographical dispersion of customers the
rupee amount of the average remittance, the firmís cost of financing.
We see that a major advantage of speeding collections is the free cash and thereby
reduce the firmís total financing requirement. There are other advantages as well. By
transferring clerical functions to the bank, the firm may reduce its costs, improve internal
control, and reduce the possibility of fraud. By getting cheque to banks on which they
are written sooner, the incidence of cheques dishonoured for insufficient funds may be
reduced.
Collection Time in the Banking System
We have made several references to the time required to collect a cheque through the
banking system but we have made no proposals to shorten it. Let us be more specific
about what is involved. Suppose a customer in New Delhi, purchases electronics
equipment from a firm in Mumbai, and remits with a cheque drawn on a New Delhi
Bank. The seller deposit the cheque in a bank in Mumbai, but the funds are not available
for use until the cheque has been presented physically to the New Delhi bank, a process
that depends on mail service between the two cities and may take several days. A very
extensive clearing network has been established in India that involves the commercial
banks and the RBI. In the majority of cases, clearing times has been reduced to 2 days
or less using the facilities of the direct inter-bank clearing. In the matter of cheque
clearing, the banks are the experts, and firms usually can rely on their banks to minimise
the time requirements.