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

a. The most sigificant concern in the cash managment infrastructure is the process of identifying the costs that have to be covered in cash and the costs that canbe covered in Credit. The CFO has to come up with the exhaustive list of items like salary, payment to vendors, buying new machinery, etc. He has to determine what is the net working capital requirement based on current assets and current liabilties for which cash is critically important

b. The definition of a lockbox system is as follows:

"Lockbox banking is a service provided by banks to companies for the receipt of payment from customers. Under the service, the payments made by customers are directed to a special post office box, rather than going to the company. The bank will then go to the box, retrieve the payments, process them and deposit the funds directly into the company bank account" (Source: investopedia)

Benefits are that this provides a mechanism for corporations to effeciently deposit and manage payments from customers especially if it receives payments by cheque and is not able to deposit them timely into the account.

c. The zero balance accounts are benefical for customers who have minimum balance that are kept in the account and helps them to prevent being charged for low balances. This specifically helps small savers and the poor of the society.

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