CASH MANAGEMENT AT WEBB CORPORATION

Webb Corporation was founded 20 years ago by its president, Bryan Webb. The company originally began as a mail-order company, but it has grown rapidly in recent years, in large part due to its website. Because of the wide geographical dispersion of the companys customers, it currently employs a lockbox system with collection centers in San Francisco, St. Louis, Atlanta, and Boston.

Holly Lennon, the companys treasurer, has been examining the current cash collection policies. On average, each lockbox center handles $207,000 in payments each day. The companys 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; the proceeds are wire-transferred to Webbs headquarters in Dallas to meet the companys payroll. The investment accounts each earn .013 percent per day, and the wire transfers cost .20 percent of the amount transferred.

Holly has been approached by Third National Bank, located just outside Dallas, about the possibility of setting up a concentration banking system for Webb Corp. Third National will accept each of the lockbox centers 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 .013 percent per day. Each ACH transfer will cost $175. Bryan has asked Holly to determine which cash management system will be the best for the company. As her assistant, Holly has asked you to answer the following questions.

QUESTIONS

1. What is Webb Corporations total net cash flow available from the current lockbox system to meet payroll?

2. Under the terms outlined by Third 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?