Receipts..

Cash sales

Collection of accounts receivables

Interest and dividend receipts

Issue of securities

Sale of assets

Methods of managing cash reciepts

Management of float.

Accelerating cash receipts.

Lock boxes

Decentralized collection

Concentration banking.

FLOAT

The cash balance shown by a firm in their books is called book balance or ledger balance

Whereas the balance cash is shown in the bank account is called the available or collected balance.

The difference between these two is referred to as float

KINDS OF FLOAT

1. collection float

2.disbursement float

1. Collection float

Cheques received by a firm creates collection float.

Cheques received will be immediately effected in the book balance of the firm

However the amount received will be effected on the bank a/c of the firm only when it is presented and collected.

2. Disbursement float

Cheques issued will create disbursement float.

Cheques issued will be immediately effected in the book balance of the firm

However the amount issued will be effected on the bank a/c of the firm only when it is presented by the receiver and collected.

Management of cash flows

A financial manager should be very specialized in management of cash flows.

I.e.. He needs to speed up the collections and delay the disbursements.

Collection time

Customer mails the cheque

Company receives the cheque

Company deposits the cheque

Cash available

Mailing time Processing time Availability delay

When a company receives payments through cheques that may arrive by mail, all three components of collection time are important.

To speed up collection, companies often follow lockboxes and concentration banking which are essentially systems for expeditious decentralized collection.

LOCK BOXES

Under this system customers are advised to mail their payments to special post offices called lock boxes, which are attended to by local collecting banks, instead of sending it to corporate head office.

The local bank collects the cheques from the lock boxes once or more a day, deposits directly into the local bank account of the firm, and furnishes details to the firm.

Advantages of lock boxes

1. Cuts down the mailing time, because the cheques are received at near by post office instead of at head office.

2. Reduces processing time because the company does not need to open envelopes and deposit the cheques for collection.

3. Shortens the availability delay because the cheques are typically drawn on local banks

When is it worthwhile????

Suppose…..

Avg. no. of daily payments……………………50

Avg. size of payments………………………Rs 8000

Normal collection time ………………….4 days

Savings in mailing & processing time….2 days

Annual rental for lockboxes……………Rs. 3000

Bank charges for operating lockboxes..72000

Interest rates…………………. 15%

Lock box will increase the company’s collected balance by:

50 items a day x 8000 Rs/ item x 2 days saved = 800000

Annual benefit in the form of interest saving on account of this:

800000 x .15 = 120000

Annual cost of lock boxes =

3000( rental) + 72000( bank charges)

Since the interest saving exceeds the cost of the lock box, it is advantageous to setup a lock box. More so because the company also saves the cost of processing the cheques internally.

CONCENTRATION BANKING

In this system the customers are asked to send their payments to local branch rather than to head office.

The cheques received by the local branch are deposited for collection into the local bank account.

Surplus funds from the local bank account are transferred regularly( mostly daily) to a concentration account at one of company’s principal banks

With the vast network of branches setup by banks, regional/ local collection centers can be easily be established.

Periodic audit should be conducted to ensure that everything is going as instructed.

Concentration banking can be combined with lockbox arrangement to ensure that the funds are pooled centrally as quickly as possible.

Instruments of collection in india

Cheque

Drafts

Documentary bills

Trade bills

Letter of credit

REFERENCE..

Financial management – Dr. Prassanna Chandra

Financial management – I.M Pandey