A Lock-Box Model

Faced with the problem of trying to reduce investment in accounts receivable, a number of corporate finance managers have directed attention to the problem of undesired "float," i.e., the dollar amount of checks payable to the subject firm but unavailable for cashing because they are in process of transmittal via the mail system. One of the most direct ways to reduce such undesirable "float" is through the use of what is called a "lock-box" arrangement. "Lock-box" is the popular term applied to an arrangement whereby a firm in one area directs their customers in another (distant) area to send their checks to a post-office box in the customer's area (city). Arrangements are made with a bank in the selected city to withdraw the checks, cash them and wire-transfer the funds to the firm's principal bank. This article presents a decision rule model for the establishment of a lock-box. The form of the model is an inequality and delineates the relevant variables. While specific lock-box arrangements with banks vary, the model presents the variables involved in the two most popular arrangements. Use of this model would permit a finance manager to appraise the profitability of possible lock-box installations.