The Lockbox That Costs More Than It Collects
A mid-sized distributor with CAD 60 million in annual revenue collects from roughly 1,800 customers, mostly small retailers paying by cheque or e-transfer. Days sales outstanding is 52 days, above the industry average of 41. The treasurer proposes a bank lockbox service costing CAD 1.10 per item plus CAD 250 per month, with an estimated two-day reduction in mail and processing float. Average daily collections are about CAD 164,000. The bank's proposal assumes 1,500 items per month. The controller notes that the company already offers e-transfer and that adoption is only 30 percent, with many customers continuing to mail cheques. Float is currently funded at 6.5 percent. The CFO wants a decision within a week and asks whether the lockbox is worth it, or whether the money is better spent driving electronic payment adoption.
1. Quantify the annual benefit of the proposed lockbox and compare it with its annual cost.
Read the worked answer
Benefit: two days of float released on average daily collections of CAD 164,000 equals CAD 328,000 of freed cash. At a 6.5 percent funding cost, the annual value is 328,000 x 0.065 = CAD 21,320.
Cost: 1,500 items per month x CAD 1.10 = CAD 1,650 per month, plus CAD 250 monthly fee = CAD 1,900 per month, or CAD 22,800 per year.
On these assumptions the lockbox is roughly break-even to slightly negative: an annual cost of CAD 22,800 against a benefit of CAD 21,320, a net cost of about CAD 1,480 per year.
The conclusion is sensitive to the assumptions. If the actual item count is higher than 1,500 per month, the cost rises proportionally and the case worsens. If the float reduction is three days rather than two, the benefit rises to CAD 31,980 and the project is clearly positive. The treasurer should validate both the item count and the float estimate with the bank before deciding, because the decision flips on those two numbers.
2. Recommend a course of action that addresses DSO rather than only float, and explain the trade-offs.
Read the worked answer
The lockbox attacks mail and processing float, which is a small part of a 52-day DSO gap. The larger opportunity is the 11-day gap to industry average, which is about customer payment behaviour and credit terms, not cheque clearing.
Recommendation: treat the two as separate decisions. On the lockbox, defer until the bank validates item volume and float; if the validated numbers show a positive net benefit, proceed, and negotiate the per-item fee down given the volume commitment. On DSO, invest in electronic invoicing, automated reminders, and incentives for e-transfer or ACH-style payment, plus a clear policy on credit terms and follow-up on overdue accounts.
The trade-offs: driving electronic adoption requires customer-facing effort and may cost more in staff time than the lockbox fee, but it attacks the 11-day gap and reduces per-item processing permanently. A lockbox reduces float but leaves the underlying collection delay intact and adds a fixed monthly cost.
A combined approach is defensible: adopt the lockbox only if validated as net-positive, while setting a target to move 60 percent of customers to electronic payment within twelve months. Measure both by DSO and by cost per collection, not by float alone.