## Managing Cash Collections and Disbursements
Two main objectives:
1. Collect receivables as quickly as possible
2. Delay payments legally within the permissible period
This improves liquidity and allows better control over working capital.
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## Understanding Float
Float = the time delay between a sale and actual receipt of usable cash.
| Type of Float | What Causes the Delay |
|---|---|
| Billing Float | Time between making a sale and sending the invoice |
| Mail Float | Time the cheque takes to reach the company by post |
| Cheque Processing Float | Time to process and deposit the cheque internally |
| Banking Processing Float | Time taken by the bank to credit the amount |
> Mnemonic: B-M-C-B → Billing, Mail, Cheque Processing, Banking Processing
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## Techniques to Reduce Float and Accelerate Collections
### 1. Concentration Banking
A decentralized collection method with multiple regional collection centers.
How it works:
- Customers in each region send payments to their local collection center
- Each center deposits into a local bank
- Local bank transfers funds to the company's centralized (head office) account
Benefits:
- Reduces mail and processing float
- Local deposits are faster and more efficient
- Funds quickly consolidated at head office
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### 2. Lock Box System
A bank-operated system where customers mail payments directly to a Post Office Box (lock box) controlled by the company's bank.
How it works:
- Bank collects cheques from the lock box multiple times a day
- Immediately processes and deposits them into the company's account
- Bank sends deposit reports to the company
Advantages:
- Eliminates mail float and cheque processing float
- Speeds up funds availability
- No internal cheque handling needed by the company
Disadvantages:
- Costly — banks charge fees for the service
- Suitable only when cheque volumes are high and average cheque value is large
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### Decision Rule for Both Systems
> Implement the system only if:
>
> Marginal income from earlier access to funds > Additional cost of the system
>
> - Benefit > Cost → Implement
> - Cost > Benefit → Avoid