Assignment:
Topic: Cash Management
Action Items:
1. Read the case study below and complete the answers at the end.
2. Prepare a 5-10 minute presentation using visuals describing your findings. Your presentation should be comprehensive including an introduction, discussion of your findings and a conclusion. .
Simpson’s Scuba Inc. is a manufacturer and retailer of scuba equipment. Currently, the firm has no coordinated cash-management system, and the firm’s management has decided to focus on ways to improve the cash collection process. A proposal from the First California Bank aimed at speeding up cash collections is being examined by several of Simpson’s corporate executives.
The firm’s current billing procedure is centralized and requires that all checks be mailed to the Malibu headquarters for processing and eventual deposit. Accordingly, it takes an average of 5 days for customers’ checks to arrive at headquarters for processing. Once in Malibu, it takes another 2 days to process the checks before they are deposit at the First California Bank.
The firm’s daily remittances average $1.2 million. The average checks size is $2,400. If Simpson’s could collect cash faster, it could invest that money. The firm currently earns 6% annually on its marketable securities portfolio. In addition to those earnings, the firm could save $48,000 in expenses related to staffing because the bank would take over much of the cash collections process.
The officers of First California have proposed a cash-acceleration plan that involves both a lock-box system and concentration bank. First California would be the firm’s concentration bank. They would establish lockboxes in four cities including: 1) Bakersfield, (2) Boston, (3) Columbus, and (4) Tampa. By doing this, funds tied up by mail float would be reduced to three days, and processing float will be eliminated. Each check processed through the lock-box system will cost $.22.
Funds would then be transferred twice each business day through the use of automated depository transfer checks (ADTCs) from local banks in Bakersfield and Columbus to the First California Bank. Each ADTC transfer costs $14. These transfers will occur all 270 business days of the year.
Based on the information given, answer the following questions:
Q1. What amount of cash balances will be freed if Simpson’s Scuba adopts the system suggested by First California Bank?
Q2. What is the opportunity cost of maintaining the current banking setup?
Q3. What is the projected annual cost of operating the new proposed system?
Q4. Should Simpson’s adopt the new system? Compute the net annual gain or loss associated with adopting the system.