Imagine you have just been hired as the Treasurer and CFO of a new company which

Question

Imagine you have just been hired as the Treasurer and CFO of a new company which has customers in 50 states and is a spin-off from an existing larger company, and as a result of this separation, you need to build a cash management infrastructure from scratch. Based on what you've read this week and your other research (as well as business sense), what are your most significant concerns in this overall effort?

As part of your overall cash management system, you might consider discussing a "lockbox" system with your banking partner. What does this system entail and what are its benefits?

Some companies use "zero-balance accounts" (sometimes referred to as ZBA's), which is a type of controlled disbursement account. What kinds of things are ZBA's generally used for and how do these accounts work? What are some of the benefits of ZBA's in the design of your overall system?"

Explanation / Answer

As the compnay has been spun off from a larger compnay and has customers in 50 states , the banking network must be lean but wide reaching. As the treasurer & CFO I shall review the exisiting bank relationships and have a discussion with the banks one by one. I shall select a few banks with wide spread presence, offering good terms for collection, loans and disburesements and having good technological platform to have seamless connectivity with the company's ERP system to offer e-banking facilities.

Then I shall find the ways that the banks offer to minimize the collection time and managing the vendor and salary disbursements in an efficient way. I shall also have a look at the check collection facilities including Lockbox facilities to quicken the collection process and the online banking process for payment processing and establish a system that matches the company's transaction volume and needs.

LockBox is a ssytem of collection management where some designated collection boxes are provided in some specified banks in various locations (nearer to customer locations) , instead of mailing the checks to company address , the customers deposit the payments in Lockbox. Banks directly deposit the checks into company's account on a daily basis. This process reduces the check mailing, collection and deposit times and greatly reduces the total payment realization time.

ZBA is a facility where a zero balance disbursement account is maintained . Everyday checks for disbursement are presented in this account and the required amount payable is transferred from a master account. No additional balance is left in this account. The master account effeciently utilises excess fund for interest income and money market investment. The ZBA is a good tool to control and monitor disbursements and reduces idle money in the account.

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