Page 280 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes
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Caution The appropriate rule for deciding whether or not to use a lock box system or for
that matter, concentration banking is simply to compare, the added cost of the most
efficient system with the marginal income that can be guaranteed from the released funds.
If costs are less than income, the system is profitable, if not, the system is not a probable
undertaking.

Self Assessment

Fill in the blanks:
5. Two very important methods to speed up collection process are Concentrating banking
and …………….system
6. In……………………, the company establishes a number of strategic collection centers in
different regions instead of a single collection center at the head office.
13.2 Cash Collection and Disbursement Systems

13.2.1 Concept of Float

Suppose U Co. Ltd., has 10 lakhs on demand deposit with its bank. It pays one of its suppliers
by writing a cheque for 200,000. The company’s ledgers are immediately adjusted to show cash
balance of 80,000. But the company’s bank should not know about the cheque till the supplier
receives the cheque and present to the company’s bank for payment. During that period, the
bank continues to show in its ledger that a company has a balance of 10 lakhs. The company
obtains the benefit of an extra 200,000 in the bank while the cheque is getting cleared. This sum
is often called payment or disbursement float.

The float can also work in reverse. Suppose U Co. Ltd. receives a cheque for 100,000 from a
customer. It deposits the cheque and both the company and the bank increases the ledger balance
by 100,000.

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