In today's low-inflation environment, bank lockboxes are transcending their traditional treasury role. Companies currently focusing on receivables management find that the lockbox can be a powerful tool in improving this critical business process.

Lockbox Networks Bring it All Together

Despite the attention banks give information float, they still have an interest in improving the treasury aspects of lockbox operations. One common innovation is the lockbox network, which moves lockbox receipts from various geographic collection points into one consolidation account on a daily basis. That simplifies treasury operations for companies that once maintained multiple lockboxes at different banks across the country.

Foreign lockboxes, particularly in Canada, provide the latest twist to this network concept. By promising next-day availability on funds received, Canadian lockboxes offered by domestic banks can reduce mail and check float by as much as a week when compared to Canadian customer checks that are mailed to the United States.

"Though each country's payment mechanisms may differ, the back-office functions that pertain to credit and receivables management remain relatively constant," says John Purciarello, director of receivable services in the Chicago office of BankAmerica Cash Management Services. As a consequence, global remittance networks are becoming a reality. However, because every company's needs are unique, there are no universal solutions. "The extra savings we might realize by trying to minimize either mail or check float barely, if at all, offsets the costs involved in setting up a lockbox network," says Steven Porter, credit manager, AmeriCold Logistics Inc., Portland, Ore. "Sometimes you can reduce mail time only to increase check-clearance time because of the disbursement programs your customers may be using. It has a lot to do with volume too."

When you talk to a bank's cash-management officer about lockbox services, you may be surprised when the discussion turns to ways the bank can help you reduce information float, the time it takes between the bank's receipt of your customer's payment and when that payment is applied to your accounts receivables (A/R). Clearly, this is a new priority for banks. "Over the last five to 10 years, we have seen an evolutionary change in lockbox products, almost a role change," says John Feldman, director of receipts management service for NationsBank. "Companies have reduced their treasury and support staffs, and there is more of a desire from the corporate perspective to have the bank handle the front end of the A/R function," he adds.

The conventional wholesale lockbox, which has existed for over fifty years, has been a treasury management mainstay. Correctly-built, lockboxes give bank clients earlier availability on their remittances, an important factor during high-inflation periods. Now that inflation has moderated, mail and check float are less of an issue. Meanwhile, information availability has emerged as a critical issue over the last few years due to widespread reengineering of many business processes and the resultant emphasis on transaction speed. This is true of accounts receivable transactions, especially when receivables activities affect inventory and production. And banks have responded to the need.

"We really serve two constituencies with each lockbox relationship," says John Purciarello, director of receivable services in the Chicago office of BankAmerica Cash Management Services. "The first is treasury, to accelerate cash flow and help the funding of the company. We also serve a second client, accounts receivable and credit management.

"In the case of treasury services, we are providing intra-day and in some cases virtually online information about cash flows into and out of their accounts. On the information side, we are also trying to shrink the receivables float. The faster customers have information for the receivables purpose, the faster they can measure the metrics of their business."

Importance of Information Float

Historically, posting corporate cash receipts has been a labor-intensive process. Traditional lockboxes provide some relief, in that the task of creating a physical deposit is eliminated. Computerizing receivables also helps from a recordkeeping standpoint, but A/R software still must be fed information. Instead of recording payments on a ledger, clerks now keypunch remittance data. Therefore, increases in transaction volume demand additional labor.

For most companies, the time spent posting lockbox deposits can range from a few hours to a few days. Most A/R software has audit controls preventing incomplete batches of remittance data from being posted, so large deposits and deposits with significant deduction or account reconciliation issues may take awhile to complete. This time is in addition to the delivery time (typically next day) required to get the remittance advice from the bank's lockbox department to the corporate client. Under this scenario, companies often face a two- or three-day lag.

This lag triggers a number of unproductive activities:

  • Credit and collection personnel manually record payments, often on their personal copies of the aged accounts receivable trial balance, so that they will have accurate, up-to-date data for releasing orders, prioritizing collections and requesting payment of past-due balances.
  • Collection activities are initiated against customers that have paid. Whether or not collectors note payments manually as described above, they lose time and credibility with customers.
  • Unnecessary credit holds delay orders. Automated credit-release algorithms will hold past-due accounts or accounts exceeding their credit limits until payments are posted or an operator intervenes. Manual credit-approval systems rely on the operator to look up each customer's payment status, which involves checking both the computerized accounts receivable and any unposted deposits. The additional review required to clear credit holds is time-consuming, subject to oversights and frustrating to the sales department.
  • Unnecessary credit holds or other delays in releasing orders affects work scheduling and inventory management. If the credit check is performed up front, it prevents orders from reaching production. When the credit check occurs on the back end of the production cycle, credit holds stall the shipping of finished goods that have already consumed valuable resources, a significant problem when customized products are involved.

When evaluating remittance-processing products or services, consider the hidden costs. Reducing information float mitigates the possibility of such inefficiencies. Orders are released sooner, customer relationships are enhanced and inventory turnover ratios are accelerated.

How Lockbox Services Improve Information Float

The first step toward reducing information float is getting rid of paper-based remittance advice. This has long been the promise of electronic data interchange (EDI), but most payments are still made by check. Lockboxes are the logical juncture for converting paper-based data to electronic information. After all, the banks are already doing some of that for the check-clearing process. As Feldman explains, "the intent is to truncate the paper at the bank. We do not want to reassociate the check with any remittance documents and send it back to the customer. They are going to be able to dial in and see a month's worth of images online and then get a CD-ROM for archival purposes."

To reach this juncture, banks must capture remittance data and convert it to an electronic format, such as the more commonly used EDI or BAI (Bank Administration Institute) formats. This information, which includes check numbers, invoice numbers, payment amounts, customer bank numbers and account numbers, can be sent via an electronic data packet to lockbox customers for posting to their accounts receivable. With this autocash application, instead of getting unprocessed paper-based data the day after the lockbox deposit, customers receive same-day remittance data.

Next, the bank must create an image of the remittance advice. Lockbox services already use imaging in the check-clearing process, so imaging other remittance documents is a logical expansion of a bank's capabilities. In fact, as banks reengineer their lockbox operations, imaging moves to the front end of the process so that bank data-entry operators work unhindered by paper documents.

Autocash and Exception Processing

There is another practical reason why banks are addressing imaging as part of the information-float solution: remittance posting exceptions. A company cannot post autocash transmission to its accounts receivable until all exceptions, such as payment deductions and payments with incomplete data, are reconciled; and reconciliation requires back-up documents. With paper documents, reconciliation usually cannot begin until the next day, but with online access to document images, exceptions can clear on the same day, eliminating virtually all information float.

In any autocash application, the critical component is exception handling. While companies want to eliminate as many exceptions as possible by using effective matching algorithms, the need remains to manually adjust exceptions so deposits post to accounts receivable software. This often requires a sophisticated software fix that many companies find too time-consuming or difficult to pursue in-house. Fortunately, new releases of A/R software address this issue, and some preprocessing software packages act as a bridge between electronic data coming from banks to A/R software modules. Most important, companies report match rates in excess of 90 percent.

Another solution to the exception dilemma is a type of matching software that runs on the lockbox bank's mainframe computers. "Corporate customers are supplied with a workstation allowing them to dial in to the bank, retrieve the exceptions of the day, and immediately resolve the exceptions to accelerate the process," says Terry Leger, vice president of marketing for IA Corp., a manufacturer of banking software in Emeryville, Calif. "The subsequent payment batch is then transmitted to the customer, ready for application to the A/R. You do not have to image-enable the entire lockbox, just the exceptions," which helps contain the costs of imaging he says. However, for a bank to provide a payment-to-invoice matching service, the corporate client must download their receivables database to the bank, which some companies prefer not to do.

Benefits of Autocash Applications

"The savings from autocash is tremendous," says Steven Porter, credit manager at the Portland, Ore. office of AmeriCold Logistics Inc., a cold-storage warehousing and transportation company headquartered in Atlanta. "What we pay the bank to create an electronic remittance file would not even pay for one more cash application clerk, and I would probably need two people to handle all remittances manually." AmeriCold enjoys up to an 80 percent hit rate with its matching software. In addition, most of the exceptions are easily cleared, which saves more time.

Automated Remittance Processing Software

The key to any autocash application is software that matches payments to receivables. If your A/R software does not have this capability and your bank does not offer a matching program, check out these stand-alone remittance preprocessing software packages.

CashApply Plus
Accounts Receivable Processing Co.
425 South 90th Street
Omaha, NE 68114
Phone:(402) 392-1768
Fax:(402) 393-3523

C/Lect Cash Preprocessor (CCP)
C/Lect Consulting
883 Camelot Drive
Crystal Lake, IL 60014
Phone:(815) 459-3613
Fax:(815) 459-9495

Early availability and application of remittance data is also critical to Porter's credit department. "We send out past-due notices once a week, and the last thing you want to do is send out a past-due notice when you have a check sitting around waiting to be applied that they have already sent you," he says. "Our system helps avoid that kind of embarrassment. It makes us much more credible, which then allows us to be much more effective."

Some businesses also will benefit from the outsourcing capabilities of a bank's lockbox department. "The ability of high-growth companies to add commensurate staff in the face of double-digit growth rates is limited," says BankAmerica's Purciarello. "They're not only looking to accelerate the information flow but to really leverage this bank back office to be an extension of their back office, allowing them to concentrate on their core competency as opposed to capturing accounts receivable data. Our focus is to make the client indifferent to how they get paid, and instead tell us how to plug into their back office."

What the Future Holds

Feldman substantiates this viewpoint. "We have already reached through treasury and are now working with credit and collections," he says. However, that is not the end of the road. "We think ultimately we will be reaching through to the trading partner as we move into enablement techniques to convert payments into electronic transactions," says Feldman. "We already have developed one such technique where a customer's trading partners dial in through a touch-tone phone to originate electronic transactions."

The Internet and intranets provide opportunities to improve remittance data flow. Internet technology provides a common, cost-effective platform and ready access to all corporate users.

"We are definitely interested in Web access," says Joyce Harrelson, accounts receivable supervisor at Tyson Foods, Springdale, Ark. Like most corporations, Tyson is taking remittance automation one step at a time. It already receives autocash transmissions of lockbox receipts and is automating deduction processing to complement that routine. Using the Internet to view images of exceptions is a logical next step.

Farther down the road, "larger corporations are going to look to do things in a high-speed environment," says Feldman. Big companies have the transaction volumes to make that cost-effective, and that will lead the way for middle-market companies to find more services which shorten their information float. Feldman adds that corporations will offer trading partners a suite of services to meet everybody's needs.

Will paper checks still be around in five years? Undoubtedly. Will corporate receivables departments still handle paper-remittance advice at that time? Not if they are information driven.