Cash Collection

How a firm collects from its customers depends in large part on the nature of the business. The simplest case would be a business such as a restaurant chain. Most of its customers will pay with cash, check, or credit card at the point of sale (this is called over-the-counter collection), so there is no problem with mailing delay. Normally, the funds will be deposited in a local bank, and the firm will have some means (discussed later) of gaining access to the funds.

When some or all of the payments a company receives are checks that arrive through the mail, all three components of collection time become relevant. The firm may choose to have all the checks mailed to one location, or, more commonly, the firm might have a number of different mail collection points to reduce mailing times. Also, the firm may run its collection operation itself or might hire an outside firm that specializes in cash collection. We discuss these issues in more detail in the following pages.

Other approaches to cash collection exist. One that is becoming more common is the preauthorized payment arrangement. With this arrangement, the payment amounts and

Ross et al.: Fundamentals of Corporate Finance, Sixth Edition, Alternate Edition

VII. Short-Term Financial Planning and Management

20. Cash and Liquidity Management

© The McGraw-Hill Companies, 2002

CHAPTER 20 Cash and Liquidity Management payment dates are fixed in advance. When the agreed-upon date arrives, the amount is automatically transferred from the customer's bank account to the firm's bank account, which sharply reduces or even eliminates collection delays. The same approach is used by firms that have on-line terminals, meaning that when a sale is rung up, the money is immediately transferred to the firm's accounts.

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