Value the float at the company's own rate, cost the lockbox net of the work it removes, and decide cheque by cheque.
A lockbox is worth it when the interest value of the collection float it removes exceeds its fees: daily receipts × days of float saved × the company's rate, against the fixed and per-item charges net of the processing cost saved in-house. On an illustrative $180 million of cheque receipts a year, cutting float by 2.5 days frees $1,232,877 of cash, worth $61,644 a year at 5 per cent, against a net cost of $10,800: a net benefit of $50,844 a year. Per item, the lockbox pays for any cheque above $1,314.
Worked in full in Treasury Management by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
Collection float is the time between a customer posting a cheque and the company having collected funds it can use: mail time, processing time inside the company, and the bank's availability delay. A lockbox moves the first two to the bank, which collects mail at a post office box near the payers, deposits the same day and sends the remittance data to the receivables team. The bank charges for it, so the treasurer's question is whether the days saved are worth the fees, and for which payments.
| Item | Value |
|---|---|
| Annual cheque receipts | $180,000,000 |
| Number of cheques a year | 24,000 |
| Average cheque | $7,500 |
| Collection float today (mail, processing, availability) | 6.0 days |
| Collection float with the lockbox | 3.5 days |
| Value of cash: revolver rate, as the company is a net borrower | 5.0% |
| Lockbox fixed fee | $500 a month |
| Lockbox fee per item | $0.60 |
| In-house processing cost saved per item | $0.40 |
Fees and float days are illustrative. Measure your own float from a sample of cheques: postmark date, date deposited, date funds were available.
Daily receipts = 180,000,000 ÷ 365 = 493,151
Float saved = 6.0 − 3.5 = 2.5 days
Cash released = 493,151 × 2.5 = 1,232,877, once
Annual float value = 1,232,877 × 5.0% = 61,644
Fixed fee = 500 × 12 = 6,000
Item fees = 24,000 × 0.60 = 14,400
In-house saving = 24,000 × 0.40 = 9,600
Net cost = 6,000 + 14,400 − 9,600 = 10,800
61,644 − 10,800 = 50,844 a year; the float value is 5.71 times the net cost
Excel: =Receipts/365*(FloatNow-FloatLB)*Rate-(Fixed*12+Items*(FeeItem-Internal))
The average hides the decision, which is made per payment stream. Put the calculation on one cheque:
Value of one cheque's float = cheque × days saved × rate ÷ 365 = 7,500 × 2.5 × 5.0% ÷ 365 = 2.57
Net cost per item = (0.60 − 0.40) + 6,000 ÷ 24,000 = 0.20 + 0.25 = 0.45
Break-even cheque = 0.45 × 365 ÷ (2.5 × 5.0%) = 1,314
Any cheque above $1,314 earns more in float than it costs to process; a stream of $400 consumer payments does not, and belongs in a cheaper channel, or better, in electronic payment. The same arithmetic gives the other two break-evens: with these fees the lockbox pays for itself at any rate above 0.88 per cent, or with as little as 0.44 of a day saved.
| Case | Float value | Net benefit | Break-even cheque |
|---|---|---|---|
| Rate 2% | 24,658 | 13,858 | 3,285 |
| Rate 3% | 36,986 | 26,186 | 2,190 |
| Base: rate 5%, 2.5 days saved | 61,644 | 50,844 | 1,314 |
| Rate 7% | 86,301 | 75,501 | 939 |
| Only 1.0 day saved | 24,658 | 13,858 | 3,285 |
| 4.0 days saved | 98,630 | 87,830 | 821 |
The value of a lockbox moves one for one with interest rates. In a near-zero rate environment the same contract would be close to break-even, which is why a lockbox network deserves a fresh review whenever rates move. Days saved matter as much: a lockbox in the wrong city that saves one day is worth less than half the base case.
| Cheques a year | Average cheque | Net cost | Net benefit |
|---|---|---|---|
| 24,000 | 7,500 | 10,800 | 50,844 |
| 60,000 | 3,000 | 18,000 | 43,644 |
| 120,000 | 1,500 | 30,000 | 31,644 |
The float value depends only on dollars and days, so it stays at 61,644; the cost depends on items. A retail lockbox handling many small payments is a processing service first and a float tool second.
Value the float at the rate the company actually pays or earns, cost the lockbox net of the work it removes, and decide per payment stream: here $50,844 a year in total and a break-even cheque of $1,314. The company's five cash balances, and where the float sits in them, are in the free Treasury Management workbooks.
Multiply daily receipts by the days of float and by the rate the company pays or earns on cash. With $180 million of receipts a year, daily receipts are $493,151; 2.5 days of float are $1,232,877 of cash, and at 5 per cent that cash is worth $61,644 a year. The release itself happens once; only the interest recurs.
Divide the net cost per item by the daily value of a dollar of float saved. With a $0.60 bank fee, $0.40 of in-house cost avoided and a $6,000 fixed fee spread over 24,000 items, the net cost is $0.45 a cheque; at 2.5 days saved and 5 per cent, the break-even cheque is $1,314. Smaller payments cost more to process than their float is worth.
Less so, because the float value is proportional to the rate. In the worked case the net benefit falls from $50,844 at 5 per cent to $13,858 at 2 per cent, and with these fees the lockbox stops paying below a 0.88 per cent rate. The processing saving and faster cash application can still justify it.
This article is one calculation from Treasury Management. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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