ACCELERATING COLLECTION OF FUNDS BY REDUCING THE COLLECTION FLOAT

Collecting Center or Agent

ABC Corporation has an agreement with Rizal Commercial Banking Corporation (RCBC) to
collect P3,000,000 a day in exchange for a compensating balance of P1,000,000. The firm, with
a significant increase in its customer are, is thinking of cancelling the agreement and dividing the
services by RCBC with ABC Bank. With this plan, RCBC will handle the collection of P2,000,000
with a compensating balance of P800,000. On the other hand, ABC bank will handle the other
P1,000,000 collection in exchange for a compensating balance of P700,000. With the planned
arrangement with the two banks to perform the collection, the firm is expecting to reduce the
collection period by one day. The firm’s rate of return is 9%. Should ABC Corporation pursue the
division of service between RCBC and ABC bank?

Lockbox System

ABC Corporation has average cash receipts of P150,000 per day. Normally, it takes 7
days from the time the check is received for it to be made available as cash. How much cash is
tied up?

ABC Corporation has an average of seven days to receive and deposit the checks from
customers. The owner believes that it takes too long for the firm to use the funds to support its
operations. In answer to this problem, a bank offers its service through the use of a lockbox
system. The banker explains that with the system in place, the expected float time will be reduced
by 4 days. The bank charges P10,000 per month for its overhead cost on the service. Should
ABC Corporation avail of the service offered by the bank? How much is the advantage or
disadvantage of the lock box system, considering the firm’s average daily collection of P450,000
and the annual rate of return of 12% in the market?
EXTENDING CASH DISBURSEMENTS

Salary payment of ABC Company is made every 15th and 30th of the month through
issuances of checks. It pays P5,250,000 per payroll. However, based on the historical clearing of
checks issued on salary; 50% will be presented on the day itself, 35% five days from the salary
date, and the remaining balance on the tenth day after the salary date. If the interest rate on
market is 12% per annum, how much is the incremental income of ABC Company if the entire
amount is not deposited?