Corporate Finance

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Corporate Finance

ACCELERATING INFLOWS: LOCK BOX SYSTEM

Lock boxes are centrally located collection post office boxes meant for intercepting receivables from custom-
ers. In a lock box system (Exhibit 16.6), the customers mail their remittances to a post office box number
rather than to the company. The company’s bank collects the lock box receipts from the post office several
times a day and processes them on behalf of the company. The bank deposits the checks received directly to
the company’s account. The obvious advantage of a lock box system is that, the mail processing and check
collection time is drastically reduced provided the lock boxes are located at optimum distance from the cus-
tomers. The company receives a hardcopy of detailed information regarding customer name, account number,
amount paid, and the funds processed by the bank at regular intervals.

Exhibit 16.6 Lock box system

Details of receivables

sent to company

Bank deposits funds

to the customer’s a/c

Customers

Region

1

Customers

Region

2

Customers

Region

3

P.O. Box 1 P.O. Box 2 P.O. Box 3

Local bank collects

Checks from P O box

Bank processes checks

and prepares a statement

Check clearing process

Lock box system is efficient in accelerating receivables and reducing clerical work for the company.
Since the processing work is delegated to a bank, the company may have to follow up from time to time to
reconcile any differences. It might be uneconomical to operate a lock box if high value transactions are not
experienced.