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Cash Management Best Practices
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checks. All these steps are needed if checks are received and processed directly
by a company.
The answer is to have the bank receive the checks instead. To do so, a com-
pany’s bank sets up a lockbox, which is essentially a separate mailbox to which
deposits are sent by customers. The bank opens all mail arriving at the lockbox,
deposits all checks at once, copies the checks, and forwards all check copies and
anything else contained in customer remittances to the company. This approach
has the advantage of accelerating the flow of cash into a company’s bank account,
since the lockbox system typically reduces the mail float customers enjoy by at
least a day, while also eliminating all of the transaction-processing time that a
company would also need during its internal cash-processing steps. The system
can be enhanced further by creating lockboxes at a number of locations through-
out the country, with locations very close to a company’s largest customers. Cus-
tomers will then send their funds to the nearest lockbox, which further reduces
the mail float and increases the speed with which funds arrive in a company’s
coffers. If there are multiple lockboxes, a company should periodically compare
the locations of its lockboxes to those of its customers, to ensure that the con-
stantly changing mix of customers does not call for an alteration in the locations
of some lockboxes to bring the overall mail float-time down to the lowest possi-
ble level. In short, there are some exceptional advantages to using lockboxes.
There are only two problems with lockboxes, one involving fees and the
other being a one-time problem with implementation. A bank will charge both a
fixed and variable-rate fee for the use of a lockbox. There is a small, fixed
monthly fee for the lockbox, plus a charge of a few cents for every processed
check. For a company with a very small number of incoming checks, these costs
may make it uneconomical to maintain a lockbox. Also, the work required to con-
vince customers to change the company’s pay-to address can be considerable.
Every customer must be contacted, usually by mail, to inform them of the new
lockbox address to which they must now send their payments. If they do not com-
ply (a common occurrence), someone must make a reminder call. If there are
many customers, this can be a major task to complete and may not be worthwhile
if the sales to each customer are extremely small—the cost of contacting them
may exceed the profit from annual sales to them. Thus, a company with a small
number of customers or many low-volume customers may not find it cost-effec-
tive to use a lockbox.
An additional issue is the number of lockboxes that should be used. A com-
pany cannot maintain an infinite number of them, since each one has a fixed cost
that can add up. Instead, a common approach is to periodically hire a consultant,
sometimes provided by a bank, who analyzes the locations and average sales to
all customers, calculates the average mail float for each one, and offsets this
information with the cost of putting lockboxes in specific locations. The result of
this analysis will be a cost-benefit calculation that trades off excessive mail float
against the cost of additional lockboxes to arrive at the most profitable mix of
lockbox locations.