In: Finance
1. Calculation of annual savings = Annual interest saving - Annual charges
Looking at the facts given in the question, we get:-
Daily receipt - $459*2568 checks = $1,178,712
Yearly receipt (assuming 365 days a year) = $1,178,712*365 days = $430,229,880
Yearly interest saving = .021%*3*$430,229,880 = $271,044.82
Annual charges = $30,000
Charges per check = $0.25
Total checks in a year = 2568*365= 937,320
Total charges = $30,000 + $0.25*937,320 = $264,330
Savings = $271,044.82 - $264,330.00 = $6,714.82
2. Apart from the savings in interest due to use of lock box, the following benefits are also to be considered:-
a) Hassle-free processing - By outsourcing the processing, the company isn't only saving the interest, It's also saving the time consumed and hence, it can put more efforts into business than check processing.
b) Increase in working capital - By decreasing the float period, the working capital is available at an average of 3 days prior and hence, the cash flows stay on a positive side
c) Better internal controls - Having a lockbox prevents the checks from getting lost due to negligence and the records are readily available for reconciliation. It also encourages segregation of duties making the internal controls stronger.
d) Accurate and timely information - The business receives timely information of checks processed and hence, it gives a better visibility of cash flows