# Concentration Banking and Lock Box System

Both are techniques to reduce float and speed up the availability of collected funds.

## Concentration Banking

Instead of a single collection centre at head office, the company opens multiple strategic collection centres in different regions.

Customers in each region remit to their nearest centre → reduces mail float.
Each centre deposits cheques with its local bank.
Local banks then transfer surplus funds to the concentration bank (the bank holding the company's main account), usually at head office.

Result: the time between the customer mailing remittances and funds becoming spendable is shortened. This is a very popular and important way to reduce float.

## Lock Box System

Usually arranged on a regional basis depending on the company's billing pattern.

Customers send payments to a post office box (lock box) rented by the company's bank.
The bank itself opens the box, processes cheques and deposits them directly into the company's account.
The internal company step of receiving, sorting and depositing is eliminated.

## Key Distinction

Aspect	Concentration Banking	Lock Box System
Who first receives the cheque	Company's collection centre	The company's bank (via P.O. box)
Eliminates which float	Mainly mail float	Mail float and internal cheque-processing float
Processing done by	Company's regional staff	Bank staff

Worked example

### Example 1

Q (4 marks): Explain 'Concentration Banking' and 'Lock Box System'.

A: Concentration Banking sets up multiple regional collection centres that deposit local receipts into a local bank, with surplus funds swept into a single concentration bank at head office — cutting mail float. Lock Box System goes one step further: customers mail cheques to a P.O. box rented by the company's bank, and the bank itself processes and deposits them — eliminating both mail float and the company's internal processing float.

⚠️ Common exam mistakes

Saying lock box is operated by the company — it is operated by the bank.
Treating the two systems as substitutes; in practice they target different portions of float and can be used together.
Forgetting to mention that concentration banking sweeps surplus funds to one central bank — this is the 'concentration' element.

Reference:

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