The most obvious benefit to an ACH payment would obviously be the speed at which the payment for your goods or services are transferred to your account. Remittances are typically transfered in the early morning hours before the banks are open, with this being the case ACH payments are processed before paper items, and available funds are committed to those ACH items on a first in, first out basis.

Another benefit is automatically realized by your businesses accounts payable department. As your customers adopt ACH as their preferred method of remitting payments there will be a direct reduction of paper check processing. With the addition of check processing scanners, even customers who insist on paying with a paper check can have the funds for their payment processed easily through ACH.

As the economy continues to tighten it’s belt there are ever increasing concerns regarding audit trails and insufficient funds notification. Providing a solid audit trail for remittances and deposits is easily managed through ACH processes. Each transaction is uniquely identifiable and search-able. This includes, origin, destination, dates, amount and other information which follow NACHA operating rules and Federal reserve guidelines.  ACH also allows for real time notice on insufficient funds regarding payments. With this the item can be directed to collections in a timely and efficient manner ensuring the best possible odds of collecting the balance due.

There are many more benefits to the ACH process including, better customer relations, improved cash flow on recurring or monthly payments, and making it easier for your customers to pay in a timely manner without reminders and follow ups. Visit Greenbill.com for more information on our ACH services for you and your customers.

In an earlier post I talked about calculating your DSO.  The most well know way to benchmark your A/R is by using the Days Sales Outstanding (DSO) calculation.  It’s a common, well understood indicator that is widely used. The fact that it is so common makes it easy to find DSO numbers for an industry or individual company, both locally and across the world. This enables you to benchmark against those DSO numbers and ask questions about your receivables. You can answer such questions as: How am I doing with my customer base compared to company X in my same industry? Are my terms in line with others in my industry? etc.. However, many credit professionals will tell you that they dislike DSO as an internal benchmarking metric and I will give you an example why.

The DSO problem

DSO is not the most accurate way to indicate if you are collecting effectively. DSO can be misleading as it has a key weaknesses, that is it fluctuates with revenue.  Changes in sales inversely affect the DSO. If your overdue receivables balance stays the same an increase in sales for the month will lower your DSO. If you suddenly have a dip in sales your DSO will shoot up. DSO, while valuable for benchmarking, cannot alone give you a clear picture of the performance of your A/R. Three other measures of collections performance include ADD and CEI. These help complete the A/R picture and let you know if you are truly being effective in your efforts to get paid faster.

Collection Effectiveness Index

The Collection Effectiveness Index (CEI) is becoming increasing popular in the credit and collections world. CEI was developed by Dr. Venkat Srinivasan and the Credit Research Foundation (Link).  With the Credit Research Foundation collecting statistics, it is also possible to do the same industry benchmarking and comparisons that you might do with DSO.  CEI is a percentage that expresses the effectiveness of collection efforts over time. The closer to 100 percent, the more effective the collection effort. CEI is ratio that measures the quality of collection efforts over time.  It is essentially the percentage of receivables closed or paid in a given time period. While “Percent Current” has a implied limit of 100%, this is not the case for CEI.

Note: for a definition of credit sales see this post

CEI is a more appropriate measure of performance over time while DSO is for measuring performance at a single point in time. CEI makes comparison with other companies possible  just as DSO does. CEI does not change if a company nets their receivables by removing items they deem disputed and therefore un-collectible.

CEI and DSO should move in opposite directions which makes sense. If your collections efforts increase your DSO should decrease. DSO and CEI can, under certain write off and revenue conditions again, track the same way and thus we have another exception.

This leads us to 2 more performance indicators that are important metrics.

Best Possible DSO

The Best Possible DSO indicates the “best” possible days you can collect on your invoices.  This measure uses the “current receivables” instead of the total receivables balance. Current receivables is the amount of your A/R that is not past due.
The closer your DSO is to the Best Possible DSO, the closer you are to collecting as fast as possible. You should not expect that you ever hit this number as is almost never possible. Assuming you give 30 days term (30 days to pay), if you can get within a 3-5 days of this you are doing really well.

Best Possible DSO = (Current Receivables x Number of Days in Period ) / Credit Sales for Period

(for a definition of credit sales see this post)

Average Days Delinquent (ADD)

Average Days Delinquent (ADD), which is sometimes called Delinquent DSO, calculates the average time from the due date to the paid date. In other words its the average days invoices are past due. It provides a snapshot to evaluate the overall company’s collection performance but it’s also useful at the customer, customer type, collector segment, etc.. This not the same as Average Days To Pay which is based on the historical information of the actual closed invoice while ADD is based on a snapshot in time (Thanks Terry)

Average Days Delinquent (ADD) = Standard DSO – Best Possible DSO

Example

Summary

In light of the fact that DSO alone does not accurately measure performance in credit and collection, we can now arm ourselves with 2 more indicators for accurately measuring performance; CEI and ADD.  When CEI and DSO track the same way because of revenue fluctuation or changed in terms of sale ADD comes to the rescue and takes both into account.

While DSO has its faults, its is a must have indicator because it is so well understood and enjoys wide acceptance amongst financial professional.  When combined with the ADD and CEI you can truly get a complete performance picture of your accounts receivable.

It is a commonly used measure for the invoicing collection process. Investopedia defines DSO as “A measure of the average number of days that a company takes to collect revenue after a sale has been made”. If you are strictly a cash business your DSO will be 0. If you generate invoices for your customers and give them credit terms (some number of days before they are supposed to pay) then you will will have an accounts receivable balance and thus a DSO . You can use the DSO number to measure the efficiency of your collections. Since DSO is so popular you can also use it as a gauge against other companies in your industry.

Calculating your Days Sales Outstanding

The calculation is as follows.

Example

Here is a very simple example of how to calculate DSO.

A company started June with $700 in receivables (Invoices still not paid from May and earlier).

Lets say the company had sales of $1100 in June.

• The company got cash for $100 that was not cash for invoices. Some one came into their office and gave them $100 for a widget that never got invoiced.
• They generated invoices with Net 30 day terms (customer has 30 days to pay) for the other $1000. These are “credit sales”. The total Credit/Invoice Sales for June will be $1000 (not $1100 since they got cash for $100 and never invoiced it, the DSO on that cash is 0).
• During the month they got payments on invoices of $500.
• So $700+$1000-$500=$1200 for their accounts receivable at the end of June. 700 that was still open + $1000 in new invoices – $500 in payments
• NOTE: it does not matter what invoices the $500 got applied to or even if it gets applied for the DSO calcualtion. It just matters what the A/R is at the end of June.
• Their accounts receivable at the end of June would be $1200. The DSO for the month of June would be $1200/$1000 X 30 (# of days in June) = 36.

A 36 day average to get paid is not to bad. Generally speaking, if your DSO is under 40 (assuming Net 30 day credit terms) you are fairly efficient at collecting your money.

DSO measures efficiency not effectiveness.

In a future article we will show you the problems with DSO. Your goal is to get paid faster and there are other performance indicators that can be used, along with DSO, to get a clearer picture of your collections effectiveness.

Check out this next post in this to get a couple of alternative ways to measure your effectiveness

Next we will review and detail managing open invoices, tracking customer payment trends and scheduling automatic follow ups for invoices due. With a comprehensive and easy to use work queue for collections, management and collecting your open invoices is no longer a dreaded task. The results, your relationships and communications with clients improve and your company gets paid faster.

A service offered by banks to companies in which the company receives payments by mail to a post office box and the bank picks up the payments several times a day, deposits them into the company’s account, and notifies the company of the deposit. Data entry clerks at the bank manually enter the information into an electronic file for transmission to the company to which the lockbox account belongs. These files are typically transferred nightly to the various lockbox owners (companies).  The files adhere to one of two standard banking industry transmission formats: BAI, BAI2, EDI820 and EDI 823.This enables the company to put the money to work as soon as it’s received.

Why use  Lockboxes ?

Lockbox process has several advantages:

• Payment information can now be processed automatically manual intervention is not needed.
• Import Processing can therefore also be handled automatically on a scheduled basis.
• Payment Reconciliation can be auto scheduled as well via the Greenbill Autocash correction process.
• Reduction of manpower needs based on less hours spent on manually manipulating the data.
• The predictability and reliability of the processes outlined above cause an overall reduction of errors throughout. This means the Cash Application process as a whole can be performed in a more timely fashion promoting better cash flow to the enterprise. This helps put the AUTO in Autocash.

BAI  Defined:

BAI (or the BAI file format) is a file format for used to facilitate cash management balance reporting. The BAI format was developed and is maintained by the Banking Administration Institute (BAI). One common application of the BAI format is for use by banks to transmit lockbox payment data to customers. The current release is Cash Management Balance Reporting Specifications Version 2, typically referred to as BAI2.  A BAI2 file contains both remittance payment and item detail. It is processed in Greenbill in a similar manner as the merged 823 cash receipt described below.

BAI VS. BAI2:

The Bai2 format lists each invoice and the specific payment amount for that invoice. The BAI format only list the invoices that are being payed as a whole.  With BAI2 the difference of the total check amount and the subtotal of amounts based on each invoice can be calculated, thus allowing the cash to be applied “On Account”. This facilitates a more accurate cash posting process. The BAI format has been rendered obsolete and has been superseded by BAI2.

What is EDI (Electronic Data Interchange?)

The computer-to-computer interchange of strictly formatted messages that represent documents . EDI implies a sequence of messages between two parties, either of whom may serve as originator or recipient. The formatted data representing the documents may be transmitted from originator to recipient via telecommunications or physically transported on electronic storage media. In EDI, the usual processing of received messages is by computer only. Human intervention in the processing of a received message is typically intended only for error conditions, for quality review, and for special situations. For example, the transmission of binary or textual data is not EDI as defined here unless the data are treated as one or more data elements of an EDI message and are not normally intended for human interpretation as part of online data processing.

820

Payment Order/Remittance Advice

To provide information to a seller about the application of a specific payment by a buyer, including (1) to order a financial institution to make payment to payee (s) on behalf of sending party, (2) to report the completion of a payment to payee (s) by financial institution, and (3) to give advice to the payee by the payer on the application of a payment, i.e. invoice, check number, etc. Lockbox

823

Data contents of the Lockbox Transaction Set (823) for use within the context of an Electronic Data Interchange (EDI) environment. The transaction set can be used to transmit lockbox (incoming payments) information and totals from a bank or any other lockbox service provider to a company.

Contrasts between EDI 820 and ED823:

EDI 820 information comes from customer not the bank. EDI 820 is not really a lockbox format but can be used like a lockbox for customer open item processing. This data is only a remittance advice not a real legal payment.

Lockbox format 823 comes from bank confirming real legal payment transactions received from customer. This is real payment information which got credited in business account at Lockbox /Bank. Other differences are:

1. EDI 823 since its coming from a bank will have payments for all bank customers that have your company as a vendor. Since EDI 820 comes from the customer directly only his transactions are contained
2. EDI 823 doesn’t contain the remittance advice line item data. The 823 data is Payment(Check) data only.
3. Note that the 823 specifies the actual payment whereas the 820 is the advice of the payment. In Greenbill the invoice detail from the 820 is merged to the 823 and supplies the complete remittance detail. The merged cash receipt is then available for import into Greenbill for cash application against the Accounts Receivable.

BAI vs. EDI in Lockbox:

Both the formats are acceptable and can be used in Greenbill for processing auto import. EDI(820,823) technology requires the use of an EDI translator program. It creates intermediate document holding the information for further process. On the other side BAI format doesn’t require this.

Some additional advantages of EDI are:

• Data is more accurate from an A/R open item perspective since the 820 comes directly from the customer.
• 820 Remittance detail data is cleaner than BAI. The remittance detail is piped directly from the A/R system of the customer and keying mistakes made at the bank with BAI are therefore avoided.

Once again, this sounds simple, common knowledge every business owner or manager should know, right?  Unfortunately knowing the rules and following them are two completely different things. How can this be solved? Simple, and it is, employ a method which corrects the commonly overlooked or unmanageable targets in a companies accounts receivables. Invoice generation, invoice delivery, ease of payment for your customers, cash application, open invoice management, and collections. This is the purpose of an EIPP system, Electronic Invoice Payment and Presentment. Integrated with a company’s order and accounting systems along with the internet as a transfer method, invoicing and payments can flow smoothly, increasing cash flow.

First we must generate the invoice. This may be done manually or using order and invoice software. Amounts, items, fees and payment due dates are generated to match contracts provided and an invoice is born.  This invoice then must be delivered to the customer. Mailed invoices have several inefficiencies; these must be reduced to streamline cash flow. Several costs, realized or unrealized are inherit to paper invoicing. Printing, envelopes, postage, time lag for actual delivery, and payment processing once received, all diminish profit, in some cases substantially. A twenty dollar invoice may cost up to five dollars to process and deliver, that cost doubles if there is a second mailing. With electronic delivery, material costs are eliminated, postage is eliminated and there is no time lag, the invoice can be directly emailed to the individual in charge of processing. Plus we are reducing the nasty CO2 emissions.  Second deliveries or follow ups are easily duplicated by regeneration of the electronic document. This is technology at work from the beginning steps; creation to delivery in 60 seconds, by following this first step through the entire process, payments can be just as efficient.

In my next post I will review payment options, which ones work, which ones don’t and most importantly, what works to get your company paid the fastest. Remember that is the goal of accounts receivable, get paid faster.

Reporting is like cooking; Business Intelligence is like Culinary Art. You should know when and how to serve your data.
Reports that we run every morning should be short and summarized as much as possible. When you get home after work, you want to enjoy your dinner, but better have it fast; kids are waiting for you to help them with homework. Same thing at work; having morning coffee you are quickly analyzing your reports before meeting with the manager. Last thing you want to see is a 10 page detailed list of new invoices generated yesterday. Total count, sum and possible average should be good enough. You always have the ability to drill in for details if you need them.
Daily reports should be simple, but not cooked rare. Try to imagine having a T-Bone that never hit the grill (perhaps you like them still mooing but humor me with the analogy). Uncooked steak is the same as query results from a database. Even a complicated query with inner select statement and a couple of left outer joins with other tables is useless if it doesn’t taste good. Taste, flavor, aroma and results matter the most.

An effective report should be marinated with conditions, filters, sections, groups, sub and grand totals. Don’t put dressing on the salad before serving; have the ability to select your own condition using dynamic prompts.
Last, but not least, don’t forget about dessert. Have a nice chart to sweeten up your report.
Enjoy your data!
Waiting for exchange recipes, by that I mean replies with your own experiences!