The firm that uses a lock box network as well as the one having numerous sales outlets which receive funds over the counter have something in common. Both firms will find themselves with deposit balances at a number of regional banks. Each firm may find it advantageous to move part, or all, of these deposits to one central location, which is known as a "concentration bank".
This process of cash concentration improves control over inflows and outflows of corporate cash. The idea is to put all of your eggs (or in this case, cash) into one basket and then to watch the basket. It reduces idle balances-that is, keeps deposit balances at regional banks no higher than necessary to meet transactions needs (or alternatively, minimum compensation balance requirements). Any excess funds would be moved to the concentration bank.
It allows for more effective investments. Pooling excess balances provides the larger cash amounts needed for some of the higher yielding, short term investment opportunities that require a larger minimum purchase. For example, some marketable securities are sold in blocks of $100,000 or more.
Concentration process is dependent upon the timely transfer of funds between financial institutions. There are three principal methods employed to move funds between banks which are depository transfer checks, electronic transfer checks through automated clearing houses, and the wire transfer.
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