Lockbox; Bank Lockboxes; Improving Cash Flow

A lockbox is a check collection system operated by a bank. Lockboxes improve cash flow. Once a lockbox is in place, customers are instructed to send payments to a post office box located near the creditor's bank's lockbox processing center. The bank collects checks from that P.O. Box several times a day and deposits the checks immediately, reducing processing time. Due to the large volume of checks processed by banks providing lockbox services, the banks enjoy economies of scale and can afford to automate much of the lockbox collection process and still offer customers this service at a relatively low cost.

The bank picks up the mail, processes customer payments as deposits and transfers information to the creditor company. The bank maintains post office boxes for receipt of payment at a central post office. Many banks have a unique zip code to speed delivery. The bank collects mail several times a day. Checks are removed from envelopes and either photocopied or recorded as a digital image, then encoded, endorsed and entered into the check clearing process. Because the bank can enter checks into the clearing system at a time when the bank is not open to the public, processing and availability delay can be reduced. Check and deposit information, along with other remittance data and any return documents, are sent to the company after the deposit has been processed and the checks are entered into the clearing system.

Two major types of lockboxes are offered by banks:  Wholesale lockboxes are used for processing a moderate number of large-dollar remittances, and retail lockboxes are characterized by a large number of relatively small-dollar remittances. 

Customer payments by check result in check float relating to the fact that the cash shown on the company's records as being on deposit is not necessarily the same as the available balance with its bank.  Credit professionals are always looking for ways to accelerate cash inflows. Lockboxes are a simple way to speed up collections.  The economic benefit of using a lockboxes involves a tradeoff between the freeing of funds by faster collection and the cost associated with dealing with a bank or third party:

• Mail time can be reduced by selecting a lockbox close to customers;
• Processing time is reduced because deposits are entered even when the bank is closed;
• Availability time is reduced because checks clear faster when the deposit point is closer to the bank on which they are drawn. 

One final comment:  Give serious consideration to asking your bank to conduct a lockbox study to determine how many lockboxes your company should have and where they should be located.  If your goal is to reduce mail float and by doing so reduce DSO, a lockbox study is one of the most important and cost effective tools your company can use to implement changes that will accelerate cash inflows.  A study might recommend a more comprehensive change in which lockboxes are added or deleted from the network, and customers are reassigned based on the location from which customers currently send payments. In certain cases, a complete overhaul is required. It is conceivable that all of the lockboxes the current network will be closed, and an entirely new configuration will be established. In this scenario, every customer would be asked to remit to a new lockbox address.

Edited by Michael C. Dennis.  Mr. Dennis is a business consultant and can be reached by email at  mcdennis13@yahoo.com with questions, comments or business inquiries.