What it means
Without a lockbox, a customer's cheque arrives at the company's office, is logged by staff, taken to the bank and eventually cleared. That chain adds days between the customer sending money and the company being able to use it.
This delay is called float. With a lockbox, the company tells customers to send payments to a box number run by its bank.
Bank staff open the mail several times a day, deposit the cheques, scan the remittance details and send the data to the company. The funds are credited to the company's account within a short time.
Large companies with customers spread across a country often use several lockboxes in different regions. Placing a lockbox near the customers shortens the mail time, and using a bank with a local clearing process shortens the clearing time.
The aim is to reduce the number of days the money is in transit. The benefit is measured in cash.
Money received a day or two sooner can be used to repay borrowing or earn interest, and the faster posting of payments to customer accounts reduces disputes. There are also fewer opportunities for fraud or loss inside the company because staff do not handle the cheques.
The cost is a monthly fee and a per-item charge, so a lockbox pays off only when volumes and values are high enough. Modern variants include electronic lockboxes that capture online and card payments and wholesale arrangements for large corporate remittances.
Some firms have reduced cheque volume so much that the traditional box matters less than before. Choosing a provider involves comparing more than price.
Companies look at how quickly the bank credits funds, how good the data capture is, how well the file integrates with the accounting system and how many exceptions the bank can resolve itself. A cheap service that produces poor data can cost more in staff time than it saves.
In practice
Real-world examples
Example 1
A utility company receives 40,000 customer cheques a month. It uses a bank lockbox to process them, and the bank sends a daily file of payment details. The accounts receivable team posts the payments automatically, so staff spend their time chasing late payers instead of opening envelopes and typing in amounts by hand.
Example 2
A national distributor sets up three regional lockboxes on the east coast, in the middle of the country and on the west coast. Customers send their cheques to the nearest one. The average mail delay falls by a day and a half.
Example 3
A charity uses a lockbox for donation cheques received after a mailing campaign. The bank opens, deposits and scans the donations, and the charity's staff avoid handling large amounts of cash and cheques. The finance director values the audit trail, because every donation can be traced from the envelope to the bank account without passing through a single employee's hands.
Think of it
Think of a lockbox system like having a dedicated concierge who picks up your mail from the sorting office, opens it, and deposits the cash straight into your safe before you even wake up, rather than waiting for it to sit in your hallway for a week.
Formula
Calculation
Cash released = Daily collections x Days of float saved
Annual benefit = Cash released x Interest rate - Annual lockbox fees
A company collects $200,000 a day in cheques. A lockbox saves two days of float, so cash released is 200,000 x 2 = $400,000. If the company uses the cash to reduce borrowing that costs 5%, the annual saving is 400,000 x 0.05 = $20,000. Lockbox fees are $9,000 a year, so the net annual benefit is 20,000 - 9,000 = $11,000.Case study
Seen in the real world
Corrigan Medical Supplies is an illustrative, fictional wholesaler with customers in every state. Its finance team found that payments took an average of seven days from mailing to being usable cash. At daily collections of $350,000, this float tied up roughly $2,450,000.
The treasurer introduced two regional lockboxes and cut the delay to four days, freeing up about $1,050,000 of cash. Using it to pay down a credit line costing 6% saved roughly $63,000 a year against fees of about $18,000. The illustrative project paid for itself in months, and the team added electronic payments to reduce the delay further.
Watch out
Common mistakes
- Setting up a lockbox without checking that the volume and value of cheques justify the fees.
- Placing the lockbox far from where customers are located, so the mail time is not reduced.
- Not reconciling the remittance data from the bank to the receivables ledger, which leaves unapplied cash.
Questions
People also ask
Who operates the lockbox?
The bank staffs and controls it, and the company only receives the deposited funds and payment details.
Are lockboxes still useful in an electronic world?
They remain useful for companies that still receive many cheques, though many have shifted to electronic payments and online portals.
What is float?
Float is the time between a payment being sent and the funds being available to the receiver, during which the money is in transit or being processed.