Question

CORP FIN Week 6 DQ #1 (Short-Term Financial Planning)

Imagine you have just been hired as the Treasurer and CFO of a new company which has customers in 50 states and is a spin-off from an existing larger company, and as a result of this separation, you need to build a cash management infrastructure from scratch. Based on what you've read this week and your other research (as well as business sense), what are your most significant concerns in this overall effort? As part of your overall cash management system, you might consider discussing a "lockbox" system with your banking partner. What does this system entail and what are its benefits? Some companies use "zero-balance accounts" (sometimes referred to as ZBA's), which is a type of controlled disbursement account. What kinds of things are ZBA's generally used for and how do these accounts work? What are some of the benefits of ZBA's in the design of your overall system?

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Answer 1

Since the new spin off company has customer reach in 50 states, it is very important to have an easy and transparent way of having the transactions with them. It is very important to have a strong cash management infrastructure. From the thorough study of past records of the stream we are handling, I believe have a lockbox with a bank is essential

What is lockbox?

As per the discussions with high officials of leading bank, Lockbox is a significant tool to do transactions between hundreds of cities and thousands of customers. It is an essential system for receiving the payments and making the payments.

The basic concept here is, bank develops a server/ mailing address where the company can directs its customer to send their payments, bank opens another server/ mailing address for company where it transfers all the payment received and any remittance information. The scanned proofs are uploaded on a secure website, where company’s accounting team can verify payment details and settle outstanding amount.

Since this service carries cost of service and maintenance, to minimize the same, the lockbox can be operated in some clusters where nearby cities can take service from cluster lockbox.

There is periodic audit so that a check is done that all the transactions are properly done. And nothing is missed.

Since we are in online generation now, this technology may vanish is=n a while as the authentication of online transaction is more trustworthy.

Hence we can also opt for Zero balance account as alternative;

What is zero balance account?

In such case, the bank opens 2 types of accounts; zero balance account and the master account.

There can be various zero balance account may be cluster wise or state wise which are started with zero balance and exact amount is transferred in such accounts of which the cheques are presented for payments and receivables given in zero balance account are transferred to the mast account instantly.

There are mainly two advantages of such account

One is, it issues debit cards but only approved expenses are transferred to zero balance account so that unapproved expenses are not done, this really helps to manage business expenses.

Another benefit is, it helps individual cluster monitoring, may be the zero balance accounts are opened cluster wise or department wise, so the activities of clusters and department are monitored easily.

Keeping master account and zero balance account is profitable too, keeping low amounts in various accounts yields low interest rates, while master account yields good interest rates since amount kept is high.

Hence it is good to have proper amount of zero balance account and a master account.

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Pls let me know if any queries.