Deriving Greater Value from Lockbox Processing
Much of the talk at the past year’s industry trade shows for financial professionals focused on remote deposit capture solutions, electronic check conversion services, Web portals and other digital offerings that bank lockbox providers are using to make their services more efficient and cost-effective than ever. Behind the trade show buzz, however, lies a bigger story – one that goes well beyond processing costs and even the lockbox itself.
That story tells how major lockbox processors, pressured by leading US companies, are positioning the lockbox to do more than cut costs. They are taking advantage of the distinctive data capture, management and delivery services provided by today’s lockbox technology to enhance receivables management, to gain better visibility into vital business activities (not the least of which are cash flow performance and working capital), and to accelerate the resolution of costly payments exceptions – and even prevent them altogether.
Companies are relying heavily on bank lockbox providers to help streamline receivables management. In the current economy, reducing payments exceptions and resolving invoice disputes is a strategic issue for more and more corporations. Beyond the millions of dollars and substantial personnel time that companies spend annually on resolution, payment errors and invoice disputes pose painful implications for B2B payments: from delayed shipments, credit distortions and frustrated departments, to customer complaints and supplier issues.
Straight through processing, where receivables post automatically, would be Nirvana. Unfortunately, defective invoices, costly payments exceptions, and incompatible and disconnected enterprise systems is the reality. That’s where the bank lockbox comes in.
By integrating data from lockbox processing – the earliest point at which a payment is handled – with information from invoice generation – a critical point in the quote-to-cash cycle – bank lockbox providers can help companies close the loop in the receivables process to maximize cash flow performance and working capital value.
To most treasury management executives in the US, lockbox processing means cheaper costs for handling checks and faster funds availability. These cost savings are real, but combining lockbox processing with receivables management, in general, and intelligent invoicing, in particular, can offer superior performance. Improvements here are critical, as accounts receivable (A/R) remains the largest current asset on the balance sheet at most companies – topping an eye-popping $1 trillion on the books of the 1,000 largest US companies alone.
And trends in receivables are not favourable. While orders can now be placed electronically within moments, deliveries made the next day, and invoices created and sent same-day, it still takes 45 to 60 days on average for companies to receive payment, according to Killen & Associates, Inc. – unchanged from 1965, when deliveries typically took up to three weeks.
But once a payment is received, there’s no guarantee that it can even be reconciled. On average, up to 30 per cent of payments received by a wholesale lockbox don’t post cleanly to an accounts receivable or enterprise resource planning system. Corporations spend an average 2 to 4 per cent of sales chasing and fixing these payment exceptions, with each exception costing an average $20 to $100. Problems in cash application have a negative effect on nearly every department of a corporation – from finance, sales and service to shipping, manufacturing and record-keeping – consuming senior management’s time, crippling customer service, and even negatively impacting the corporation’s stock price.
With resolutions taking up to 180 days, payment exceptions adversely affect operations, inventory turns, trade credit, days sales outstanding (DSO) and shareholder value.
Making matters worse are quality errors in invoice generation. In a typical Fortune 500 company, it’s not unusual for 18 to 35 per cent of outgoing invoices to be inconsistent with customer expectations and fail the automated three-way accounts payable (AP) reconciliation test. Defective invoices typically have three to four times the DSO of a clean invoice. So if 77 per cent of the invoices are clean and paid in 34 days, and 23 per cent are defective and aren’t paid for 79 days, the average DSO works out to 44, a full 10 days higher than the best possible DSO of 34. Many factors can cause problems in reconciling invoices, including: complex pricing, missing purchase order, over/under shipments, discount terms, change orders, tax and freight issues, duplicate/split orders, warranty entitlement, obsolete part numbers, mismatched part numbers, missing information.
And despite all the talk about automating the financial supply chain, paper invoices remain a fact of life for corporate America. Nearly 15 billion recurring business-to-business bills and invoices are generated each year, and this number is rising. With 96 per cent of invoices still arriving on paper, and less than six per cent of them processed through electronic data interchange (according to AIIM – the Association for Information and Image Management), invoice handling isn’t likely to go away anytime soon.
The solution: proactively neutralizing the root causes of invoice disputes upstream in the quote-to-cash cycle to reduce DSO, unlock working capital, and drive business performance.
Intelligent invoicing software can use algorithm-based reconciliation rules to proactively check every transaction for errors that can subsequently cause late payments, and alert users on exceptions that can now be resolved proactively. Users get a workbench of tools to systematically fix root causes and collaborate cross-organizationally to resolve disputes. Integrated information and holistic views available through this management dashboard provides both tactical and strategic corporate value.
With intelligent invoicing, more error-free invoices can now be generated and processed without manual intervention from the buyer’s AP team, increasing customer satisfaction and eliminating additional costs from penalties. Other benefits of intelligent invoicing include: DSO/AR reduction; elimination of revenue leakage; real-time monitoring of financial performance; process automation; support of Six Sigma initiatives; real-time monitoring of compliance control points; and audit-ready processes and invoice transactions.
Not surprisingly, intelligent invoicing technology is attracting considerable interest from US corporations. But it is also drawing the attention of more banks looking for ways to expand their cash management capabilities to include enhanced receivables services.
Receivables services, such as intelligent invoicing, are critical to expanding the lockbox beyond a commodity-priced, transactional utility, into a key cog of financial supply chain management.
By providing intelligent invoicing as a Web-based extension of their lockbox services, banks are better positioned to deliver the improved insight into working capital management that corporations crave. Moreover, integrating the information used to generate invoices with the data collected during lockbox processing can significantly reduce the number of payments exceptions, and accelerate resolution. For a Fortune 500 corporation, an improvement as small as half a day on postings can result in more than $10m a year in savings.
For banks, intelligent invoicing stands as a lucrative value-added extension of an otherwise stagnant product. It is a way for bank lockbox providers to reverse shrinking margins.
Intelligent invoicing also serves as an electronic ‘tether’ between banks and their corporate customers, making it more difficult or unappealing for clients to switch lockbox providers. For a market of overwhelmingly similar looking products, this helps banks stand apart from the crowd. And employing an ASP delivery model for intelligent invoicing provides banks faster time-to-market, while minimizing their capital investment and minimizing operations risks.
Most importantly, intelligent invoicing takes the lockbox one step closer toward cash flow performance management. Because of competitive issues, resource constraints, and regulatory compliance concerns, companies are demanding integrated cash flow solutions from their banks. Stovepipe applications like the traditional lockbox will soon be a thing of the past.
Incorporating receivables management services, such as intelligent invoicing, offers bank lockbox providers with opportunities bigger than handling commodity-priced transactions. While the operating savings for bank customers are real, corporations that take advantage of these services can also achieve superior financial performance, operational efficiency, and compliance management. They also receive a better platform for managing cash flow and working capital.
More bank lockbox providers recognize the importance of the working capital management cycle to their corporate clients and prospects. This is good news because ‘the most sophisticated companies in the US are raising the stakes for the banks competing for their cash management business,’ according to Greenwich Associates. Forward-thinking banks are taking action by expanding the lockbox to include new models for receivables services.