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Lockbox system for accounts receivable

4. (1 point)
A firm has arranged for a lockbox system to reduce collection time of accounts receivable. Currently the firm has an average collection period of 43 days, an average age of inventory of 50 days, and an average payment period of 10 days. The lockbox system will reduce the average collection period by three days by reducing processing, mail, and clearing float. The firm has total annual outlays of $15,000,000 and currently pays 9 percent for its negotiated financing.

(a) Calculate the cash conversion cycle before and after the lockbox system.

(b) Calculate the savings in financing costs from the lockbox system.

Solution Preview

(a) Calculate the cash conversion cycle before and after the lockbox system.

Cash conversion cycle (CCC) = AR days + Inventory Days - Payable days
Before the lock box system
AR days = 43, Inventory days ...

Solution Summary

The solution explains how to calculate the cash conversion cycle before and after the lockbox system and the savings in financing costs from the lockbox system

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