Webb Corporation was founded 20 years ago by its president, Bryan Webb. The comp

ID: 2784075 • Letter: W

Question

Webb Corporation was founded 20 years ago by its president, Bryan Webb. The company originally began as a mail-order company, but has grown rapidly in recent years, in large part due to its website. Because of the wide geographical disper- sion of the company’s customers, it currently employs a lock- box system with collection centers in San Francisco, St. Louis, Atlanta, and Boston.
Holly Lennon, the company’s treasurer, has been exam- ining the current cash collection policies. On average, each lockbox center handles $193,000 in payments each day. The company’s current policy is to invest these payments in short- term marketable securities daily at the collection center banks. Every two weeks, the investment accounts are swept; the pro- ceeds are wire-transferred to Webb’s headquarters in Dallas to meet the company’s payroll. The investment accounts each earn .012 percent per day, and the wire transfers cost .20 per- cent of the amount transferred.
Holly has been approached by Third National Bank, lo- cated just outside Dallas, about the possibility of setting up a concentration banking system for Webb Corp. Third National
will accept each of the lockbox center’s daily payments via automated clearinghouse (ACH) transfers in lieu of wire trans- fers. The ACH-transferred funds will not be available for use for one day. Once cleared, the funds will be deposited in a short-term account, which will yield .012 percent per day. Each ACH transfer will cost $150. Bryan has asked Holly to determine which cash management system will be the best for the company. As her assistant, Holly has asked you to answer the following questions.

QUESTIONS
1.   What is Webb Corporation’s total net cash flow available from the current lockbox system to meet payroll?
2.   Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?
3.   What cost of ACH transfers would make the company indifferent between the two systems?

Explanation / Answer

Part 1:

Existing Cash Collection Policies

Lockbox Center

San Fransisco

Boston

St. Louis

Atlanta

$1,93,000.00

Total Collection available for sweep

$27,02,000.00

$1,08,08,000.00

Interest Earnings

$324.24

$1,296.96

Wire Transfer Expense

-$5,404.00

-$21,616.00

Net Cashflow

$26,96,920.24

$1,07,87,680.96

Concentration Banking Policy

$1,93,000.00

Total Collection available for sweep

$25,09,000.00

$1,00,36,000.00

Interest Earnings

$301.08

$1,204.32

Wire Transfer Expense

-$150.00

-$600.00

Net Cashflow

$25,09,151.08

$1,00,36,604.32

Total Net Cashflow available from current lockbox system is $1,07,87,680.96

Part 2:

Total Net Cashflow available from current lockbox system is $1,07,87,680.96, while the Total Net Cashflow projected from ACH lockbox system will be 1,00,36,604.32. The principal difference between the figures is primarily due to Third National Bank policy, wherein the deposited cash wont be availble for 1 day for usage, hence every 2 weeks when the Webb Corporation intiates the sweep, it will have cashflows from 13 days available for sweep, instead of the collected 14 days. On the upside, the expense towards, the existing wires transfer is around $21,616.00, while under ACH system it will come down to mere $600.00. But still the earning out of lower fund transfer is not enough to compensate for the unavailability of 1 day collection out of 4 centres totalling to $7,72,000.00. Hence, Webb Corporation would be best suited by existing system.

Part 3:

Below shown are the Existing & Projected Cashflow as % of Sweep. They stand at -0.0018000 & 0.006022 respectively. So clearly Third Bank Collection policy helps generate positive returns, but if we increase the ACH transfer rate from exitisting $150/ transfer to $5,018/ transfer, cumulating to $20,072, the returns generated will become equivalent to existing system and generate net return of -0.001800. So, if National Bank starts to charge an ACH fee of 0.20%, web corporation becomes indifferent to both systems.

Existing Cash Collection Policies

Total Collection available for sweep

$1,08,08,000.00

Interest Earnings

$1,296.96

Wire Transfer Expense

$(21,616.00)

Net Cashflow

$1,07,87,680.96

Net Cashflowas % of total sweep

-0.188000%

Concentration Banking Policy

Total Collection available for sweep

$1,00,36,000.00

Interest Earnings

$1,204.32

Wire Transfer Expense

$(600.00)

Net Cashflow

$1,00,36,604.32

Net Cashflowas % of total sweep

0.006022%

Part 1:

Existing Cash Collection Policies

Lockbox Center

San Fransisco

Boston

St. Louis

Atlanta

$1,93,000.00

Total Collection available for sweep

$27,02,000.00

$1,08,08,000.00

Interest Earnings

$324.24

$1,296.96

Wire Transfer Expense

-$5,404.00

-$21,616.00

Net Cashflow

$26,96,920.24

$1,07,87,680.96

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