Cash Management at Richmond Corporation

CASH MANAGEMENT AT RICHMOND CORPORATION Everest University Financial Management Dr. John Halstead April 8th, 2011 ABSTRACT Team D researched and worked out three problems to find out how Richmond Corporation, a mail order company which has grown extensively to four states due to being on the internet and because of the wide geographical area of its customers, now has to determined which cash management system will be the best for the company.

The team has to provide answers to determine whether Richmond should proceed with the concentration banking system, the total net cash flow will be able to meet payroll and the cost of the transfer being indifferent between the two systems. CASH MANAGEMENT AT RICHMOND CORPORATION Richmond Corporation was founded 20 years ago by its president, Daniel Richmond. The company originally began as a mail-order company but has grown rapidly in recent years, in large part due to its Web site. Because of the wide geographical dispersion of the company’s customers, it currently employs a lockbox system with collection centers in San Francisco, St.

Louis, Atlanta, and Boston. Steve Dennis, the company’s treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $235,000 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, and the proceeds are wire-transferred to Richmond’s headquarters in Dallas to meet the company’s payroll. The investment accounts each pay . 68 percent per day, and the wire transfers cost . 20 percent of the amount transferred. Steve has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Richmond Corp. Third National will accept the lockbox centers’ daily payments via automatic 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 . 75 percent per day. Each ACH transfer will cost $200. Daniel 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 Corporation total net cash flow from the current lockbox system available to meet payroll? The amount collected each day is $235,000. The amount transferred is total amount collected on a daily bases from the four different locations for a period of 14 days, plus the interest in the amount of 0. 68 per day. Daily collection=235,000 per lock box Number of lock box=4 235,000×4=$940,000 Wire transfer cost=0. 20% Interest rate=0. 068% per day Net cash flow =$940,000x. 002=$1,880 $940,000-1,880=$938,120 Future value=present value(1+interest)n Future value=$938,120(1+0. 0068). 4 1. 0068x. 04=1. 0003 $938,120×1. 0003=$938,401. 43 for 1 day 2 weeks= $938,401. 43×14 Total net cash flow$13,137,620 2. Under the terms outlined by Third National Bank, should the company proceed with the concentration banking system?

Richmond Corporation should proceed with the concentration banking system. By using the concentration banking system, it would be saving Richmond Corporation some money. With the current cash collection policies, using the lock box, it is costing Richmond Corporation a little bit of extra money. Net cash flow=$940,000 Each ACH=200×4=800 940,000-800=$939,200 Short term will yield . 075=$939,200(1+. 0075) FV=PV(1+i)n (1. 0075). 04=1. 0003 PV= $939,200×1. 003=$$939,481. 6 for 1 day 2 weeks= $939,481. 76×14=$13,152,745 3. What cost of ACH transfers would make the company indifferent between the two systems? 1,880+14=26,320 per lock box Concentration banking system=800 per day 800×14 =11,200 Over a two week period =26,320-11,200=15,120 15,120/14 Indifferent between the two =1,080 Work Cited Ross, S. , Westerfield, W. , Jaffe, J. , (2010) Corporate Finance, 9th ed. The McGraw-Hill/Irwin