Lockbox System

A lockbox system is a cash collection method in which a business asks its customers to send their payments to a post office box that is controlled by its bank rather than to the company's own office. The bank collects the mail several times a day, opens the envelopes, deposits the checks directly into the company's account and sends the company a file listing every payment received. The service itself, and the banks that offer it, are described in the entry on lockbox banking; this entry looks at the system from the point of view of the company's accounting and treasury functions.

The main aim is to reduce collection float, the delay between a customer sending a payment and the company having usable funds. A lockbox also improves internal control, because company employees never handle the incoming checks, and it lets the receivables team apply cash to customer accounts faster.

• The company prints the lockbox address on its invoices, so customers mail checks and remittance slips to the bank's post office box.
• The bank picks up the mail frequently, often from a postal facility near a major sorting center, which cuts mail time.
• Bank staff or scanners capture the check images and remittance details, and the checks are deposited the same day.
• The bank sends an electronic file of payments, which the company's system uses for automatic cash application against open invoices in accounts receivable.

A retail lockbox handles large volumes of small, standardized consumer payments, such as utility bills, and relies on machine-readable payment coupons. A wholesale lockbox handles fewer, larger business-to-business payments with varied remittance documents, and usually involves more manual data capture. Companies with customers spread across the country sometimes use several lockboxes in different regions to shorten mail time further.

A distributor receives about $1,500,000 of customer checks each business day. Before using a lockbox, checks are mailed to its office, opened, logged and taken to the bank, so funds become available about four days after the customer mails them. With a regional lockbox, availability falls to about two days. The reduction in float is:

Here $\text{Average daily receipts}$ is the typical value of payments received per day and $\text{Days of float saved}$ is the reduction in collection time. Funds freed are $1,500,000 times 2, or $3,000,000. If the company can earn or save 5 percent a year on that money, for instance by paying down a credit line, the annual benefit is $150,000. If the bank charges a monthly fee plus a per-item charge totaling $40,000 a year, the system is worth about $110,000 a year to the business.

Faster collection reduces days sales outstanding (DSO) and supports better working capital. Separating the receipt of cash from the people who record it is a basic control against theft and lapping, the practice of using one customer's payment to cover another's stolen payment. The daily lockbox file also makes the monthly bank reconciliation easier, because deposits recorded in the books match the bank's records item by item. Bank fees for the service are recorded as an operating expense, typically within bank charges.

Lockboxes remain common in the United States, where many businesses still pay by paper check. However, check volumes have fallen steadily since the mid-1990s as payers move to ACH and card payments. Banks have responded with electronic lockbox services, which collect and format electronic payments and remittance data in the same file as checks, and with remote deposit capture, which lets a business scan checks itself. Lockbox decisions are usually made as part of a company's broader cash management strategy and its float management policies, and are a standard product offered by bank treasury services teams.