Cash Collection & Concentration: Definition & Components

Cash Collection & Concentration: Definition & Components
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  • 0:00 Collection Time
  • 0:44 Accelerating Collections
  • 1:49 Lockbox System
  • 2:52 Lesson Summary
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Lesson Transcript
Instructor: Natalie Boyd

Natalie is a teacher and holds an MA in English Education and is in progress on her PhD in psychology.

When a company makes a sale, they don't always get the money right away. In this lesson, we'll examine cash collection time and how to accelerate it using the lockbox system and cash concentration.

Collection Time

Sami owns a mail-order business. Whenever she sells a product, her customer mails her a check. But Sami doesn't get the money right away. Instead, she's stuck waiting for the check to arrive in the mail, then waiting for her bank to process the check and make the funds available to her.

What Sami is dealing with is the collection time of her business, which is the time it takes to make cash available for a business. This time can vary greatly, depending on a number of factors, including what collections systems are in place.

To help Sami understand her business' collection time better, let's look at how to accelerate cash collections, and then examine one popular acceleration system.

Accelerating Collections

As we said, collection times vary widely from business to business. But there are three general stages of collections. First, the client mails the check, which takes days to get to the business. For example, if Sami's client mails her a check from across the country, she might not get the check in the mail for 3-4 days.

Then, Sami has to take the check to the bank and deposit it. This, plus bank processing of the check, might take another day. Finally, the bank will make the funds available, usually several days after they process it. All in all, this classic system could mean that Sami has to wait seven or eight business days before the funds are in her bank account and available for her.

But every day that the funds aren't available to Sami's business is a day that they can't use those funds to grow and make even more money. Thus, some businesses choose to use a system focused on accelerating collections, or reducing the time that it takes to make cash available to a business. There are many programs focused on acceleration. One popular option is the lockbox system. Let's take a closer look at that now.

Lockbox System

Sami understands that accelerating her collections is important. And she's heard that the lockbox system could help her do that. But what, exactly, is the lockbox system?

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