Richmond Ltd. was founded 20 years ago by its president, Daniella Richmond. 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 dispersion of the company’s customers, it currently employs a lockbox system with collection centres in Toronto, Calgary, Montreal, and Vancouver.
Steve Dennis, the company’s treasurer, has been examining the current cash collection policies. On average, each lockbox centre handles $185,000 in payments each day. The company’s current policy is to invest these payments in short-term market-able securities daily at the collection centre banks. Every two weeks, the investment accounts are swept, and the proceeds are wire-transferred to Richmond’s headquarters in Winnipeg to meet the company’s payroll. The investment accounts each pay 0.068 percent per day, and the wire transfers cost 0.20 percent of the amount transferred.
Steve has been approached by Manitoba National Bank, located just outside Winnipeg, about the possibility of setting up a concentration banking system for Richmond Ltd. Manitoba National will accept the lockbox centre’s daily payments via automated clearinghouse (ACH) transfers in lieu of wire transfers. 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 0.075 percent per day. Each ACH transfer will cost $200. Daniella has asked Steve to determine which cash management system will be the best for the company. Steve has asked you, his assistant, to answer the following questions.
1. What is Richmond Ltd.’s total net cash flow from the current lockbox system that is available to meet payroll?
2. Under the terms outlined by Manitoba 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?