Float, Lock Box, Cash Concentration


What is a Float?

Float related to funds has already been transferred by the payer but not yet able to utilize the fund to the payee. Float comprises with four major components. Which are briefly described as below:

  • Collection float: It relates the overall time gap from the mailing of payment by the payer until the funds available to the receivers bank account.
  • Mail float: it occurs from the time of the payment or cheque until it received to the payee.
  • Processing float: It is counted from the buffering time before the cheque is deposited into the bank account.
  • Availability float: It refers to the time gap which is taken in order to clear the cheque.

 Why use lockbox system?

A lock box system create impact on all three components of float. Clients make payment to post office box, which can only be emptied by firm’s bank. The firm allow bank to take the cheques and instantly send them to get clearance. The bank processes the payment as soon as possible and deposits the payments accordingly into firm’s bank account. The bank sends deposit slips to the firm so that they can be deposited by the firm. Due to the matter that firms customer can access the nearest location of lockbox, hence, the mail time would be reduced and sometimes clearing time is also reduced. The processing time would be near zero as the bank deposits cheques before firm processes them. The firm analyzes the benefit of lock box by executing Cost and Benefit Analysis (CBA) according to the float value reduction in dollars, the company’s cost of capital, the annual of operation expenses of the lock box system and the tax rate. In order to analysis lock box location the pertaining matters should be considered as below:

  • Identifying customer zone
  • Gathering the data of bank cost
  • The costs of the float

What is Cash Concentration?

This is a decentralized system of account receivable whereby firms operate business in larger geographical area such as- multi-national companies. Then, they establish plenty of collection center to receive payment from the client. Once the client handover the cheque to the collection center, subsequently the cheque will be deposited into the local branches of the concentration bank. Then the local bank transfers a specific amount of money on daily basis to the bank head quarter. This will influence rapid collection of payment for the firms.

What is the advantages of concentration banking?

  • The collection process causes a larger pool of fund which will provide temporary interest for the firm, often daily basis
  • As all the funds are deposited in a central location, the controlling power over the fund is convenient and easier.
  • It provides short-term financing and better investment decisions.

Thank you for reading. Stay tuned for more articles.

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