Concentration banking

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Cash Management Techniques/ProcessAccelerating Cash CollectionsControlling DisbursementsConcentration banking : 

Cash Management Techniques/ProcessAccelerating Cash CollectionsControlling DisbursementsConcentration banking

Concentration banking : 

Concentration banking System whereby customers make payments to a regional collection center then deposited in local bank for quick clearing; which transfers funds to a principal bank.

Related Terms: : 

Related Terms: Concentration account A single centralized account into which funds collected at regional locations are transferred. Concentration services Movement of cash from different locations into a single concentration account from which disbursements and investments are made.

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ConcentrationBank A financial institution that is the primary bank of an organization, or the bank where the organization does most of its transactions. Several organizations use multiple banks, but generally deal significantly with one bank in particular, which is referred to as the concentration bank. Example of Concentration Bank An example of a concentration bank can be a company which has multiple chain stores across the country and each store deposits its cash into local banks. The company can set it up so that these funds can be concentrated or deposited into one account, usually called a concentration account, at a concentration bank.

Benefits concentration Banking : 

Benefits concentration Banking It reduce the time needed in the collection process by reducing the mailing time. Deposit float is reduce by the concentration banking. Concentration permits the firm to ‘store’ its cash more efficiently.

Floats : 

Floats 1.Postal float : Postal float is delay between the time when a payer mails a payment and the time when the payee receives it. 2.Lethargy/ Processing float : It is delay between the receipt of a cheque by the payee and its deposit in the account

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3.Bank/Clearing float : It is the delay between the deposit of a cheque by the payee and the actual availability of funds. 4.Deposit Float : It is the funds despatched by a payer that are not yet in a form that can be spent/used by the payee.

Lock box-concentration banking : 

Lock box-concentration banking A lock box-concentration banking system is a traditional method of reducing receivables float. A lock box is a post office box to which customers address their payments. A messenger from the company's bank empties the box, often several times a day, and takes the checks to the bank where they are immediately deposited to the company's account.

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A company doing business in many locations might use concentration banking to further speed up the availability of funds. It's primary bank would set up lock boxes in several cities and employ local banks to remove and deposit the checks. Then the primary bank would “concentrate” the funds, transferring them electronically to a central account. The net effect is to reduce significantly the time “the check is in the mail.”

Benefits of Lock-box System : 

Benefits of Lock-box System 1. The bank performs the clerical task of handling the remittance prior to deposits, service which the bank may be able to perform at lower cost. 2. The process of collection through the banking system beings immediately upon the receipt of the cheque/remittance and does not have to wait until the firm completes its processing for internal accounting.

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Example- A Firm use a continuous billing system that result in an average receipt of Rs. 40,00,000. It is contemplating the institution of concentration banking, instead of the current system of centralised billing and collection. It is estimated that such a system would reduced the collection periled of account receivable by 2 days. Concentration banking would cost Rs.75,000 annually and 8% can be earned by the firm on investments. It is also found that a lock-box system could reduce its overall collection time by four days and could cost annually Rs.1,20,000.

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Question: 1. How much cash would be released with the concentration banking system? Ans.1-Cash released by the concentration banking systems = Rs 40,00,000 x 2 days = Rs 80,00,000

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2. How much money can be saved due to reduction in the collection period by 2 days? Should the firm institute the concentration banking system? Ans.2- Saving = .08 x Rs. 80,00,000 = Rs. 6,40,000. The firm should institute the concentration banking system. It cost only Rs. 75,000 while the savings expected are Rs. 6,40,000.

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3. How much cash would be freed by lock-box system. Ans.3- Cash released by the lock-box system = Rs. 40,00,000 X 4 days = Rs. 1,60,00,000

4. Between concentration banking and lock-box system, which is better?Ans.4- Saving in lock-box system : 0.08 X Rs. 1,60,00,000= Rs. 12,80,000Lock-box system is better. Its net saving = Rs.12,80,000 – Rs. 1,20,000= Rs. 11,60,000Which is higher than that of concentration banking. : 

4. Between concentration banking and lock-box system, which is better?Ans.4- Saving in lock-box system : 0.08 X Rs. 1,60,00,000= Rs. 12,80,000Lock-box system is better. Its net saving = Rs.12,80,000 – Rs. 1,20,000= Rs. 11,60,000Which is higher than that of concentration banking.

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