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Cash Collection: Lockbox System

The firm should identify sources of float and maximize available funds by accelerating cash collection and controlling disbursements. Methods to accelerate cash collection include lockbox systems, concentration banking, and automatic debits, which reduce mail and processing float. Controlling disbursements can be done through zero-balance accounts and electronic fund transfers to minimize cash balances and utilize funds efficiently. Transfer pricing refers to internal prices used for goods/services transferred between organizational units in different countries.

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59 views2 pages

Cash Collection: Lockbox System

The firm should identify sources of float and maximize available funds by accelerating cash collection and controlling disbursements. Methods to accelerate cash collection include lockbox systems, concentration banking, and automatic debits, which reduce mail and processing float. Controlling disbursements can be done through zero-balance accounts and electronic fund transfers to minimize cash balances and utilize funds efficiently. Transfer pricing refers to internal prices used for goods/services transferred between organizational units in different countries.

Uploaded by

Leo the Bulldog
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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The firm should identify the various sources of float and accordingly plan and make efforts to

take advantage of each source so that the availability of its usable funds will increase.

​Cash Collection

It aims at maximizing the availability of cash for productive use.

There are different methods for accelerating cash collection or reducing the collection float.
These include

● lockbox system​ An MNC may establish lockboxes in different places around the
world, or rent a postbox and authorize its local bank to pick up the contents in the
box. Customers are requested to mail their remittances to the lockbox. The local
bank opens the lockbox one or more times daily, collects the cheques, and
processes them for clearance. The daily record of receipts is communicated to the
MNC through an electronic data transmission system.
As lockboxes are established at different geographical locations close to the
customers and the bank itself collects the cheques from the lockboxes, the
lockbox system ​reduces mail float as well as processing float​. Thus, lockboxes
allow an MNC to increase the availability of funds by a few days over the usual
system.
● Concentration banking​ The cash collection arrangement can be either
centralized or decentralized. In the centralized arrangement, the payers,
particularly customers, are instructed to make remittances directly to a centrally
located collection centre. In the decentralized collection system, the firm opens a
number of collection centres. They are geographically spread for the convenience
of customers. Customers are asked to send their payments to a collection centre
close to them. The collection centre receives the cheques from the customers and
deposits them with a local bank. The funds are then transferred to the firm's
disbursement bank account(s) or concentration bank.
● automatic debit or payment by wire​Firms can also accelerate cash collection by
asking customers to remit the payments by wire or through automatic electronic
debits. In the electronic debit system, the funds are automatically debited from
one account and credited to another account.
Cash Disbursement

the disbursement float arises when the cheques issued by the MNC have not been debited to the
bank account on which they are drawn. This can be utilized by the MNC to its advantage.
Through proper estimation of the disbursement float, the MNC can minimize cash balances with
the bank, which ultimately results in effective utilization of cash.

There are different ways of controlling disbursements including such as zero-balance accounts
and electronic fund transfers.

● A ​zero-balance account​ (​ZBA)​ ​ is an arrangement with a bank that allows the firm
to write cheques against a bank account containing zero balance. This facility
works well for MNCs that maintain a master disbursing account to service
subsidiaries. As the master disbursing account of the MNC will service all the
subsidiary firms’ accounts, the subsidiaries can have a zero balance in their
accounts. This means that the affiliates of an MNC need not hold cash balances in
their bank accounts to issue cheques against their accounts. At the end of the day,
just enough funds are transferred automatically from the master disbursing
account to the subsidiary accounts in order to cover the cheques presented for
collection. The subsidiary accounts will have a zero balance at the end of the day.
Therefore, the zero-balance account eliminates the need to estimate and maintain
the cash balance of each disbursement account. This will ultimately lead to
increased efficiency in cash disbursements.
● electronic fund transfers​The need for paper cheques, with their associated mail
and processing float, is eliminated with electronic fund transfer. MNCs also use
the automatic debiting system, under which funds are electronically deducted
from one account and added to another account without any loss of time. With the
electronic fund transfer system being very much in vogue, the total float in the
fund transfer process is reduced to zero.

Transfer Pricing

A transfer price can be defined as the price used for the internal sales of goods and services
between the divisions of a business enterprise.​ ​transfer pricing is the price which is paid for
goods or services transferred from one unit of an organization to its other units situated
in different countries. ​The intra-firm sales which take place between the branches of an MNC
create the need for internal prices to value the exchanges between the divisions.

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