Cash Management - Cash Management In deciding whether to...

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Cash Management In deciding whether to adopt a cash management system, the financial manager should consider its associated costs vs. the return earned from implementation of the system. Companies with many bank accounts should guard against accumulating excessive balances. Less cash needs to be kept on hand when a company can borrow quickly from a bank, such as under a line of credit agreement , which permits a firm to borrow instantly up to a specified maximum amount. Excess cash should be invested in marketable securities for a return. Note, however, that cash in some bank accounts may not be available for investment. For instance, when a bank lends money to a company, the bank often requires the company to keep funds on hand as collateral. This deposit is called a compensating balance, which in effect represents restricted cash for the company. Acceleration of Cash Inflow To accelerate cash inflow, the financial manager must devise procedures for quick deposit of checks received and quick transfer of receipts in outlying accounts into the main corporate account. The various types of check processing delays that must be analyzed are: (1) mail float – the time required for a check to move from a debtor to a creditor; (2) processing float – the time it takes for a creditor to deposit the check after receipt; and (3) deposit collection float – the time required for a check to clear. Mail float can be minimized by having the collection center located near the customer. Strategic post office lockboxes may be used for customer remissions. The local bank collects from these boxes periodically during the day and deposits the funds in the corporate account. The bank also furnishes the company with a computer listing of payments received by account and a daily total. Before a lockbox system is implemented, the company should make a cost-benefit analysis that considers the average dollar amount of checks received, the costs saved by having lockboxes, the reduction in mailing timer per check, and the processing cost. Example 1 Chaset Corporation obtains average cash receipts of $200,000 per day. It usually takes 5 days from the time a check is mailed to its availability for use. The amount tied up by the delay is: 5 days x $200,000 = $1,000,000 Example 2 It takes Travis Corporation about 7 days to receive and deposit payments from customers. Therefore, a lockbox system is being considered. It is expected that the system
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will reduce the float time to 5 days. Average daily collections are $500,000. The rate of
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This note was uploaded on 02/01/2009 for the course ACTG 6610 taught by Professor Ward during the Spring '09 term at Middle Tennessee State University.

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Cash Management - Cash Management In deciding whether to...

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