Collection Process

Norma’s Cat Food of Shell Knob ships cat food throughout the country. Norma has determined that through the establishment of local collection centers around the country, she can speed up the collection of payments by two and one-half days. Furthermore, the cash management department of her bank has indicated to her that she can defer her payments on her accounts by one-half day without affecting suppliers. The bank has a remote disbursement center in Iowa.

a. If the company has $5 million per day in collections and $3 million per day in disbursements, how many dollars will the cash management system free up? Justify your answers.

$5,000,000 daily collections

$5,000,000 × 2.5 days speed up = $12,500,000 additional daily collections

Speeding up the collection payments by 2.5 days will create $12,500,000 in available cash

$3,000,000 daily disbursements

$3,000,000 × .5 days slow down = $1,500,000 delayed disbursements

With Norma deferring her payments on her account by one-half day, she creates another $1,500,000 in cash

Norma now has $14,000,000 in freed-up funds.

b. If the company can earn 8 percent per annum on freed-up funds, how much will the income be? Justify your answers.

14,000,000 x 8% = 1,120,000 Income earned

Because Norma sped up the collection of payments from her collections centers by two and one-half days and deferred her payments on her accounts by one-half day without affecting her suppliers and after paying the interest of 8%, she has income earnings in the amount of $1,120,000

c. If the annual cost of the new system is $800,000, should it be implemented? Explain why or why not.

Norma should implement the new system because she will still have income earnings in the amount of $320,000 after she implements the new system. By speeding up her collections by two and one-half days and deferring payments by one-half day, she can afford to implement the new system. With this extra income, she can now improve overall corporate...