Page 256 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 11: Management of Cash

Under this arrangement, the company rents the local post-office box and authorize its bank at Notes
each of the locations to pick up remittances in the boxes. Customers are billed with instructions
to mail their remittances to the lock boxes. The bank picks up the mail several times a day and
deposits the cheques in the company's account. The cheques may be microfilmed for record
purposes and cleared for collection. The company receives a deposit slip and lists all payments
together with any other material in he envelope. This procedure frees the company from handling
and depositing the cheques. Thus, the lag between the time cheques are received by the company
and the time they are actually deposited in the bank is eliminated. The main drawback of lock
box system is the cost of its operation. The bank provides a number of services in addition to
usual clearing the cheques and requires compensation for them. Since the cost is directly
proportional if average remitted is small.

!
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.

11.4 Cash Collection and Disbursement Systems

11.4.1 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.

Company’s ledger balance + Payment float
800,000 200,000

equals

Bank’s ledger balance
10,00,000

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