Process Improvement Solutions May Be Closer Than You Thought

Today's credit executives continue to face the challenge of increasing productivity with fewer resources - namely personnel and money.

One of more labor intensive functions within most firms is the "billing to cash application process. Or, as some call it, "cradle to grave." If you are still collecting and applying cash the old fashioned way, you may be missing an opportunity to reduce processing costs and speed up cash flow simultaneously.

Although we have heard about the "check less society" for several years, the majority of businesses are still a long way from check less transactions. While the technology - hardware and software - to handle B2B (business to business) transactions has existed for some time, commercial firms have been slow to climb onto the bandwagon.

Many credit executives may hesitate to explore available technology due a lack of experience and/or knowledge of how it can be used to make their lives easier and improve their companies' cash position. Others may still believe in the old adage, "If it isn't broke, don't fix it." However, those who see value in process improvement would say, "If it isn't broke, break it, and then fix it right!"

To the credit executive who has been hesitant about "automation," my advice is "jump in, the water is fine." Seriously though, I recommend sitting down with your IT folks to openly discuss the areas you would like to change or improve and to determine if your present system can support such changes or improvements. A good friend of mine, who is a senior consultant for SAP, frequently reminds me that the majority of ERP system users utilize approximately only 50-60% of their systems. The following list of functions would be a good starting point for discussion with your IT staff:

• Invoice/Statement delivery
• Collection letter series
• Deduction Management
• Payment Method
• Cash Application
• Management Reporting

When talking with your IT staff, don't assume that they know your job and/or the functions for which you are responsible. The better they understand your job and functions, the more they will be able to assist you in achieving your process improvement goals. You may be pleasantly surprised how easily your goals can be accomplished.

Delivery of invoices and customer statements electronically can be accomplished in several ways: web based access - customer accesses creditor's web page using login and password, downloads documents; email - documents are emailed to customers as an attachment; or, documents can be faxed directly to customer from system or desktop. Electronic delivery reduces or eliminates the costs associated with printing and mailing invoices and statements.

Most all ERP (enterprise resource planning) systems; i.e., SAP, BaaN, Oracle, PeopleSoft and J. D. Edwards, are capable of generating a series of collection letters based on the parameters and text you determine. Such letters can generally be transmitted electronically via email and fax, or printed and mailed. You determine the type of customer that would most likely respond to such letters. Electronic delivery reduces time spent by a credit or collection person printing and mailing letters, as well as the postage costs.

Deduction management can be handled by software presently available on the market or through outsourcing. Reduction or elimination of time spent physically dealing with customer deductions, as well as reducing deductions themselves will generally offset the cost of software or outsourcing.

Payment method is a topic that has generated a good deal of interest of late. While most all retail businesses have long accepted credit cards as a form of payment, many commercial firms have been reluctant to accept credit cards for payment against accounts receivable balances. However, purchase or corporate use is growing in popularity and the discount rate charged by banks and credit card processing companies is generally offset by the prompt credit of funds. Another payment method that has enjoyed increased popularity is the ACH transaction. No documentation is required; all a creditor needs is the customer's bank account number, check #, bank ABA routing numbers and the amount of the payment. This information is entered into the ACH access provider's webpage and transmitted through the ACH network for settlement. Funds are usually deposited to the creditor's account in 48 hours. For those readers who are presently utilizing lockboxes for collection of B2B customer payments, an improvement in the process may be coming later this year in the form of the 21st Century Act (commonly known as Check 21). Check 21 provides the legal framework for banks to clear paper-based transactions as either a "physical check," an "image of a check" or a "reproduced digitalized image of a check." Check 21 will allow banks to truncate, or convert lockbox payments from commercial customers (presently banks can only truncate payments made to retail lockboxes by consumer customers) for settlement without physically sending the checks through the clearing bank. Settlements will be based on electronic check images.

Many companies still apply cash the "old fashioned" way; using a copy of a customer's check, or the "live check" as an input document. Included in this category are those companies who utilize lockboxes for collection of customer payments, but still receive a copy of the customer's check and any attached remittance advice for use as input documents. Automatic cash (auto cash) application is not new, it has been around since the 1970's and has been used by many companies operating lockboxes. The basic process works as follows: the bank operating the lockbox downloads a file to the creditor's ERP (or other type) system daily or at other specified intervals; the downloaded file contains the customer's payment information - payment amount(s), invoice(s) being paid and customer number; based on the payment information, payments are then applied to the customer account(s). A "hit rate" of accurate payment application of 75% or better is considered average for this process. Considering the amount of time it takes for cash application personnel to apply customer payments, if they only have to deal with "exceptions" of 25% for less, the savings can easily be calculated.

Month-end reporting is probably the easiest process to automate. Even if your company does not have a powerful ERP system, accounts receivable aging and other files can be downloaded into a spreadsheet software and refined for publication. Publication can be as simple as emailing the reports to those at the management level who require the information. Or, publication can be as sophisticated as posting the report on your company's internal website for viewing by management at their convenience.

While the above described process solutions may sound like "rocket science" to some readers, they are here today. "Jump in, the water is fine."