Mariano Gonzales, newly-hired finance manager of Manila Mill Supply, was not satisfied with the current collection arrangements of his companys two sales outlets. He wanted to change the present system of sending collections by mail and instead use messengerial service or a collection facility offered by a local bank.

The Company

Manila Mill Supply was a supplier of machine tools and mill equipment replacement parts based in Pandacan, Manila. Its main clients were cement companies and sugar mills. The companys products were machine tools and wearing parts of sugar mills, cement plants and flour mills. Most of the high-quality and low cost producers of steel casting materials like mill suppliers were in Manila, and the company had established relationship with these foundaries.

The company sold its products from its main office in Manila since its founding 20 years ago by Ang Wa Bin. Two years ago, the company opened two new outlets in Batangas City, Batangas and Angeles City, Pampanga. Batangas City served the cement plants and sugar mills in the south while Angeles City delivered sugar mill parts to customers in the north.

Cash Collection System

Orders from customers were taken by salesmen covering their areas. Two sales offices delivered the products to the customers under specified credit terms. The Manila office supplied goods that were not available at the two outlets. To ensure control of collections, Ang Wa Bin required that all check payments be sent directly to the main office. Customers paid in checks and sent them by mail. Receivables from customers in Manila were collected by personnel assigned in the main office.

For a long time, the company did not have a finance manager, Ang Wa Bin assigned his wife, Sinforosa, to take charge of the companys finances and bank relations. Oriental Bank, the companys sole bank, serviced its loan requirements and managed its deposits. Ang Wa Bin considered the problem of control of cash serious. He feared that one incident of fraud would wipe out the capital he had accumulated for 20 years. However, Sinforosa had difficulties handling the check collections from the mails, leading to discrepancies in records of customers in their branch locations. Ang Wa Bin decided to hire Sinforosas brother, Mariano, a recent MBA graduate of De la Salle University, as finance manager.

Two Collection Options

Gonzales traced the discrepancies to a number of incorrectly prepared bank reconciliation statements and managed to fix the records. He thought that the collection system for the branch locations was cumbersome and could be improved. He considered two options: one, to collect directly using the main office vehicles and collectors, and two, to hire Oriental Bank to collect from branch customers.

Gonzales suggested that the checks be picked up from the dealers by collectors to reduce delays. The two outlets had average collections of P800,000 per week. In all, two used utility vehicles cars were needed, costing P45,000 each, and two additional personnel at a total cost of P60,000 per year. He estimated that the system would speed up collection by four days. He wanted to calculate the financial savings with the present average return on money market rate at an attractive 18 percent per year.

When Oriental Bank heard about Gonzales concerns, an officer from the bank offered its collection services to the company through its Batangas City and Angeles City branches. The companys branch personnel were to collect from Manila Mills customers deposit only checks. The checks would be deposited at the branches of Oriental Bank that were nearest to the customers location. Manila Mill Supplys account at the Oriental Banks head office would be credited upon advice by the branches. Because most checks were out-of-town issuances requiring local clearing, the proposed service would reduce delays to an average of only two days. It would cost the company an estimated amount of P48,000 annually in telephone and collection charges.

GUIDE QUESTIONS

Estimate the total float under the current and proposed collection procedures assuming the present normal bank clearing process for check payments.