Introduction to Corporate Finance

Ross et al.: Fundamentals

of Corporate Finance, Sixth

Edition, Alternate Edition

VII. Short−Term Financial

Planning and Management

20. Cash and Liquidity
    Management

(^710) © The McGraw−Hill
Companies, 2002
payment dates are fixed in advance. When the agreed-upon date arrives, the amount is
automatically transferred from the customer’s bank account to the firm’s bank account,
which sharply reduces or even eliminates collection delays. The same approach is used
by firms that have on-line terminals, meaning that when a sale is rung up, the money is
immediately transferred to the firm’s accounts.
Lockboxes
When a firm receives its payments by mail, it must decide where the checks will be
mailed and how the checks will be picked up and deposited. Careful selection of the
number and locations of collection points can greatly reduce collection times. Many
firms use special post office boxes called lockboxesto intercept payments and speed
cash collection.
Figure 20.3 illustrates a lockbox system. The collection process is started by cus-
tomers’ mailing their checks to a post office box instead of sending them to the firm.
The lockbox is maintained by a local bank. A large corporation may actually maintain
more than 20 lockboxes around the country.
CHAPTER 20 Cash and Liquidity Management 683
lockboxes
Special post office boxes
set up to intercept and
speed up accounts
receivable payments.

FIGURE 20.3

The flow starts when a corporate customer mails remittances to a post office box instead

of to the corporation. Several times a day the bank collects the lockbox receipts from the

post office. The checks are then put into the company bank accounts.

Firm processes

receivables

Local bank

collects funds from

post office boxes

Bank check-clearing

process

Envelopes opened;

separation of

checks and receipts

Deposit of checks

into bank accounts

Details of receivables

go to firm

Customer

payments

Customer

payments

Post office

box 2

Post office

box 1

Customer

payments

Customer

payments

Overview of Lockbox Processing