Question

a) Describe what a lock box is and what lock boxes contribute to a receivables process.

b) Describe why your instructor warns against expensive lock box studies.

Answer 1

A- A lockbox is a system of reducing mail float in which banks provide a operated mailing address to which all company's customers send their payments. In this system bank collects the cheques and mails, deposits all received funds in the company's account, and scans the payments and any remittance information. The scanned images are send to company's accounting staff so that they can access the images to apply payments to outstanding accounts receivable.

A companies place multiple lockbox at multiple location so that aggregate mail time from the customers to the lockboxes is minimized. With the help of lockbox system mail float can be reduced to a great extent. So lock box system plays a very key and important role in receivable process as updates the status of recovery of receivables and reduce the float time too.

2- Lock box system is an expensive method of receivable collection. Bank which is providing lock box facility charges heavy amount as a fee and it number of collection are low at the location of lock box in this case it would be a costly affaiir. Many time change in location of lockbox system due to low number of customers can create problem for the accounts receivable staff due to keep updating the pay-to addresses in their computer systems