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.

With a simple mouse click or two, reports are generated, invoices printed in triplicate and letters, complete with typographical errors are created, most only to be thrown away either at the source or final destination. What is the true cost for a single page document to your companies bottom line? What are the ways to reduce this waste of both resources and money?

Larry Phelps has kindly provided us with these statistics on the staggering cost and quantity of paper in the workplace. For more information please visit his site and his expertise on efficient and environmentally document imaging.  larryphelps.wordpress.com

• Over its life-span, a single sheet of paper ends up costing an average of $30. -Delphi Group.
• Every year 7.5 billion documents are created and 15 trillion copies are made.
• E-mails will double to 60 billion a day in 2 years.
• 7% of documents are permanently lost.
• The average document is copied 18 times.
• 90% of business information is still on paper.
• Misfiled documents cost $120 each.
• 4-drawer file cabinets cost $25,000 to fill.
  and $2,000 per year to maintain. (Source: Coopers & Lybrand 2004)
• $14,000 worth of productivity is lost per worker per year due to their inability to find the data they require to do their job.-IDC Canada.
• Professionals spend 50 percent of their time searching for information, and take 18 minutes to locate each document on average. -Gartner Research.
• US companies spend approximately $20 on labor costs in order to file a document, $120 on the labor required to find a misfiled document and $220 to reproduce a lost document. -Coopers & Lybrand.
• Companies typically misfile up to 20 percent of their records – thus losing them forever.

With these facts in mind, it only makes sense, both financially and environmentally to examine the options for online invoicing, electronic payments and software based accounting. All of these provide a significant reduction in paper, paper related costs and environmental impact.

See for yourself , try the Greenbill Green Billing Calculator and find out how much paper is really costing your company.

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

He question to me was, “Why does recycling and saving seem more important when people have less?”

Now this may contradict my opening statement, yet it is very clear that although there is less outward focus on being “Green”, companies and individuals would appear to do more regarding conservation and recycling in times of economic strain. Reusing materials, equipment, and reducing energy usage to save. Swing shifts at the office to reduce heating and cooling costs, electricity usage at non-peak rates and on, and on. The same is very true for individual households. Lights turned off which otherwise would be left on, reducing fuel by commuting less or by public transportation, reusing items which otherwise would be thrown away, it is human nature and one which should be evaluated to help with the quest for a “Green” planet.

Now the challenge is to keep these habits in place during times of economic growth and abundance. Easier said than done? Well, we have begun a list of what we do as a family to help conserve and reduce energy, disposables and resources at our house. The kids have figured that with these notes we can see exactly how our “Green” habits can be retained as economic times improve. By continuing these habits we will be even farther ahead as we move into the future, helping the planet for my children’s children.

 Try it at your home or business; you may be surprised exactly how easy it is to be “Green” and to stay that way.

10. Seamless 2-way integration with Quickbooks.

9. Get up and going with Greenbill in minutes. It is painless and leverages your existing Quickbooks data.

8. Get up to date access to who paid and who owes from anywhere online. Works on the iPhone too.

7. Greenbill makes it super easy to get paid online via Credit Card, Paypal, Google Checkout or better yet by ACH/eCheck.

6. Quick and convenient  ACH/eChecks. ACH is $0.35 per payment instead of 2-3% of the transaction.

5. Your customers will love the your branded web portal. Its simple, fast and easy to use.

4. The reporting kicks ass. See trends and payment patterns for your customers that you have been missing in Quickbooks.

3. Set it and Forget. You never have to worry about making sure the invoices and reminders get to the right people.

2. Our Customers get paid 10 days faster on average when they use our solution for their invoice delivery, collections and online payments process.

And…..(Drum Roll Please)
1. Go Green and Get Paid Faster. If you are still sending paper out of Quickbooks, STOP IT.  Greenbill is good for the planet and good for your business.

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.

It’s important to remember that someone else’s lack of planning is not always your emergency.  Even if their situation really is dire, and even if it directly impact’s you, your best course of action may be to put that item down as “next” on your list, rather than dropping everything to deal with this new issue.

It takes a significant amount of time to switch your brain to a new context. See Umich study. Every time you change tasks, you leave your prior task in an unfinished state, figure out what has to happen with the new task and then get started on that.  If new tasks keep landing in your lap sooner than you can get the old one done, you have to switch contexts more than once per task.  If your tasks change often enough that the context switching takes longer than the time spent doing your task, you are thrashing.

The longer you spend working productively on any task, the more effective you become.  When you switch from one task to another before the first is done, you have to add the time it takes to familiarize yourself with the new project to the time it takes to finish both tasks.

We each have several lists of things which needs to be done.  We have a long list of things which need to be done some time when you get a chance, like a vacation in a far-off place.  This is the sort of thing you dream about, plan for and then some day you go.  We also have a list of things which need to be done by a certain time.  Sometimes this list gets so long you miss deadlines.  The critical list is your short list.  This is a small number of things you want to finish today.  Sometimes your short list never gets hit because somebody else’s emergency bumped you off of it, and you are working on their list.

If you can manage your short list of things to do, then you can minimize the number of times you need to switch contexts, and by doing so you get more done.  When someone contacts you with a task, you need to evaluate that event against your own priorities.  If the event is a true emergency, there is nothing wrong with dropping what you are doing in order to help.  However, if it can wait long enough for you to finish what you are doing, you can more effectively finish your list of tasks.  Better yet, if you can place it further down on your list you can maybe get through your short list on time, saving the new thing for a new day.

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.