Question

How does a lockbox collection system reduce the three components of collection float?

Describe the principal cash transfer tools

List the costs and benefits of running a cash concentration system

Answer 1

Ans 1 . Using a lockbox, Income reciepts are placed in a Post Office box wwhich can be emptied several times a day by baank personnel, who process the payments and deposit the income funds into the firm's accounts. This reduces mail delivery delay and processsing delay, as the bank processes the payment rather firm. A second popular method, best used for regular payments such as utility, cable bills , or insuraance premiums, is the presuthorised checks that allow the firm to deduct funds from the payers bank account . Remote capture allows the firm to scan in paaper checks so they can be processed electronically ; on line bill pay also eliminates paper and reduces float by allowing the transaction to process electronically.

Ans 2

Principle cash transfer tools are

1. Doxo - Seattle-based doxo (Jeff Bezos is an investor) is an online payments service disguised as a file-storage firm: Store all your bills, banking info and vendor information and poof, doxo can pay 'em, with nary a check in sight. CEO Steve Shivers would not disclose specific fees for the service, other than to say it runs about one-third of the cost of electronic funds transfers

2. Dwolla - This socially oriented funds-transfer tool requires users to preregister, identify and confirm a transfer before funds move. Yes, it's a hassle. But the payoff (or, rather, low payout) makes it worth your while: Dwolla moves funds electronically for as little as a quarter. No, not a quarter of the payment--just 25 cents.

3. pay near me - You can print your concert or movie tickets at home, so why not cash? Mountain View, Calif.-based PayNearMe lets you do just that, sort of. The shop has a deal with 6,300 7-Eleven stores that makes it possible for users to swap a home-printed funds-transfer receipt for greenbacks. Rates vary, but the company says they are in line with current banking exchange costs. This won't be the cheapest way to get your dough, but it's the most flexible.

4. Intuit payment network - Payment Network is the e-money giant's attempt to stay relevant in the low-cost funds-transfer game. And Intuit is not messing around. Not only is the company moving money for 50 cents per transfer, but funds under $5,000 can clear in one business day.

5. Pop money - New York-based Popmoney would be just another mobile funds-transfer firm--the tool moves cash to any e-mail address or mobile phone--save for one thing: It has deals with Citibank, PNC and many other first-line banks. Which means you can test the fast-funds-transfer waters from the security of a traditional bank account.

Ans 3 The operation of the cash concentration system can broke down into three elements:

1.The benefits and costs of a cash concentration system

2.Methods of transferring funds

3.Practical applications

Firms realize several benefits of having funds located in a single (or just a few) accounts, including greater control, better cash management and investing opportunities, and potentially, the possible existence of positive dual balances when funds are moved between accounts. At the same time, operating a cash concentration system entails several costs, which include:·The administrative costs of managing the system·The cost per item when balances are moved upward within the system·The lost interest realized when funds accumulate in non-interest earning accounts (an opportunity cost The logistics of moving collected balances from the gathering point to the firm’s central bank can be accomplished by using a mail depository transfer check (largely outdated today), an electronic transfer via an automated clearing house (ACH), or a wire transfer. Of these three, wire transfers provide near immediate availability but are quite costly compared to ACH, therefore the cost effectiveness of a wire tends to be justified only if the dollar value being transferred is considerable. A firm’s cash flow timeline which highlights the basic points within the cash concentration system is a good starting point for some practical insights.

The financial manager can generate increase shareholder value by skillfully controlling the cash concentration system in several ways:1 . Decide upon the optimal transferred to the use. The equation below can be used by the firm to select the most cost efficient transfer method: Incremental Benefit = DS * [k – ecr(1 – rr)] * TBAL Where:·DS =The number of days saved the faster transfer method·k= The firm's investment opportunity rate·ecr= The bank's earnings credit rate·rr= The required reserve rate·TBAL= The balance to be transferred The incremental benefits equation can be used by the firm to select the most cost efficient transfer method. The dollar value of TBAL represents the minimum dollar amount of the balance being transferred in order to justify the specific tool. That is, while a wire transfer is costly. By comparison with ACH transfer, the fund availability at the receiving account is immediate and can therefore be invested at the firm's opportunity cost rate. As a result, the firm can earn more than the return earned at the firm’s field bank