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

(^712) © The McGraw−Hill
Companies, 2002
Atlantic does business in the southwestern part of the country (New Mexico, Ari-
zona, and California). The proposed lockbox system would be located in Los Angeles
and operated by Pacific Bank. Pacific Bank has analyzed Atlantic’s cash-gathering sys-
tem and has concluded that it can decrease collection time by two days. Specifically, the
bank has come up with the following information on the proposed lockbox system:
Reduction in mailing time 1.0 day
Reduction in clearing time  .5 day
Reduction in firm processing time .5 day
Total 2.0 days
The following is also known:
Daily interest on Treasury bills .025%
Average number of daily payments to lockboxes2,000
Average size of payment $600
CHAPTER 20 Cash and Liquidity Management 685

FIGURE 20.4

Funds are transferred

to concentration bank

Cash manager analyzes bank balance and deposit

information and makes cash allocation revision

Statements are sent by mail to firm

for receivables processing

Customer

payments

Customer

payments

Maintenance of

cash reserves

Disbursements

activity

Short-term

investment of cash

Maintenance of

compensating

balance at

creditor bank

Firm sales

office

Concentration

bank

Local bank

deposits

Post office

lockbox receipts

Customer

payments

Customer

payments

Firm cash

manager

Lockboxes and Concentration Banks in a Cash Management System