A lockbox system is a service provided by banks to businesses for the receipt of payment from customers. The term “lockbox” refers to a post office box that the bank operates on behalf of the business.
Under this system, customers send their payments directly to the lockbox. The bank then collects these payments, processes them, and deposits the funds directly into the business’s bank account. This arrangement allows the company to access the funds more quickly, reduces the handling of cheques by the company, minimizes mail float (the time delay from when the payer mails the cheque and the payee receives it), and can provide more security.
Here’s the step-by-step process:
- The company sets up a lockbox account with a bank and directs customers to send payments to the lockbox address.
- The bank collects payments from the lockbox. Depending on the agreement, this could be several times a day.
- The bank processes the payments. This usually involves opening envelopes, extracting payments, and capturing relevant information.
- The bank deposits the payments into the company’s account and updates the company’s accounts receivable records. The bank also sends a report to the company detailing the remittances.
- The company updates its own records using the information provided by the bank.
This system is particularly useful for companies that receive a large number of payments via checks, have customers spread across a wide geographic area, or want to optimize their cash flow management.
Example of a Lockbox System
Consider a utility company, let’s call it PowerLight Co., which has customers all over the country. Every month, PowerLight Co. sends out thousands of bills for electricity usage to its customers.
Without a lockbox system, customers would send their payments directly to PowerLight Co.’s offices. Then, PowerLight Co.’s employees would need to manually open each envelope, extract and process the checks, and update their accounts receivable system. This could take a considerable amount of time. Additionally, the checks may take several days to reach the office due to postal delivery times (known as mail float), further delaying the time it takes for PowerLight Co. to receive and access these funds.
With a lockbox system:
- PowerLight Co. sets up a lockbox service with its bank. The lockbox is essentially a P.O. box that the bank manages on behalf of PowerLight Co.
- PowerLight Co. directs its customers to send their payment checks to the lockbox address.
- As per their agreement, the bank collects the payments from the lockbox daily.
- The bank processes these payments by opening envelopes, extracting checks, depositing the funds directly into PowerLight Co.’s account, and capturing relevant information about the payers and payment amounts.
- The bank provides PowerLight Co. with an electronic list of all received payments, which PowerLight Co. can use to update its accounts receivable records.
By using this system, PowerLight Co. can access customer payments more quickly and efficiently, reducing the amount of time and resources spent on payment processing. This can lead to improved cash flow, reduced operational costs, and enhanced customer service.