Question 11.10: A company has an average daily float of 1,500,000 € and an a...
A company has an average daily float of 1,500,000 € and an average delay of 4 days. The total amount of float is then equal to
1, 500, 000 × 4 = 6, 000, 000 €
Assume the company can reduce the float by 2 days at a cost of 2,500,000 €. The total float reduction will be equal to
1, 500, 000 × 4 = 3, 000, 000 €
If the cost of reducing the float is lower, that means the company should reduce it and benefit from an NPV of
3, 000, 000 – 2, 500, 000 = 500, 000 €
Banks offer lock-box services to directly receive and process the checks from the company’s customers, so to speed up the collection and the crediting of the money on the company’s bank account.
The service comes at a cost that normally involved a variable cost per number of checks processed and a fixed fee to be paid for the wiring of the amounts to the target account.
Normally the lock boxes are a postal service maintained by local banks, and some companies may even use plenty of lock boxes. Checks are collected many times per day and process them depositing the related amounts in the company’s accounts.
Thanks to lock boxes the mailing time is normally reduced due to the direct mailing of the checks to the bank. There is also an electronic version where the customers can use telephone or the Internet to authorize payments of transactions.