Kevin Kane:
Welcome to another First Business Bank podcast. I'm Kevin Kane, and I'll be your host for today's episode about improving accounts receivable collections. To help explore this topic further, I'm joined by Kim Preston and Melissa Fellows. Would each of you take a moment to introduce yourself to our listeners?
Melissa Fellows:
Sure. I'm Melissa Fellows and a director of Treasury Management for First Business Bank. Thanks for having me, Kevin.
Kim Preston:
Good afternoon. I'm Kim Preston, also a director of treasury here at First Business Bank in the Milwaukee region.
Kevin Kane:
Great. Thank you, Kim. Thanks, Melissa. So to get us started on the topic, Melissa, I think I'll begin with you, and would like to get your perspective to start out with. Based on your experience with existing clients and helping clients, what are some of the best practices within a treasury or accounting function that get in the way of improving the collection of payments? For example, things that clients should stop doing to drive some improvement in that area?
Melissa Fellows:
Sure. So I guess if we had a live audience, which we don't, so if you're driving, don't take your hands off the wheel, but I would first ask is how many of you take your checks or make a deposit to the bank? While, we love seeing you, we love having people in our lobby, just from a business efficiency timing standpoint, there's a number of... or just the time involved with taking that check deposit to the bank, how long does it sit in your office before you actually get to the bank? And then, the liability of having employees potentially take significant volumes of cash or large check deposits to the bank. So one would be is just making sure that you're getting your receivables to the bank in a timely and efficient and in a safe manner.
A couple of other things that come to mind too that stop doing, if you're holding account numbers or credit card numbers on your accounting software system, definitely use your bank platform, use your merchant partners online platform to securely store that information and to not keep that in a file cabinet somewhere, or in your own accounting software. Use your solution partners services for that. And then the other thing I think of nonprofits is photocopies of checks. A lot of not-for- profit clients will take a photocopy of a check before they run it to the bank and deposit it. There is scanning technology that allows you to deposit the check from your office, but that is also taking an image of that check for you, or likely your bank is imaging that for you for overnight processing. So talk to your bank about ways that you can get better reporting for the paper checks that you are depositing at the bank. So Kevin, those are I think a couple that come to mind.
Kevin Kane:
Terrific. Thanks Melissa. Kim, is there anything you would add to that idea of, hey, stop doing this? Maybe a quick way to demonstrate some improvement on the collection side.
Kim Preston:
One thing that we definitely work with clients on is just to automate processes. So there's always that standard, "Oh, we've always done it this way." So that's one thing we try to educate clients on and say, well, what about this? Here's another option that you could try. For instance, during the pandemic, we saw an uptick in the use of remote deposit and lockbox, because also both are vehicles where you aren't physically going to the bank. Those are just two options. There's several other options From an ACH standpoint. You have the ability to hold funds from your vendors, which is called an ACH collection. So again, there's some efficiencies gained. So I would say first and foremost, it's taking a look at your existing process and that's what we like to do, and then say, okay, have you thought about this? What about this? Because efficiency is what is really going to help drive, not only from a revenue standpoint, but just even from your workforce standpoint, they can save time doing these mundane kind of tasks. They can put their hours to work for other things.
Kevin Kane:
Terrific. I like that point a lot, Kim. I'll use some other words to describe it. It's almost what's the baseline environment that a particular company is operating in on the receivables collection side to start off with? So taking an inventory or an audit type process to say, this is what we're doing today, because I would imagine that in some cases, companies don't really know where to begin and where to focus their efforts to start off with. So the ability to do that baseline assessment, and then from there with your treasury professional, identify some places where you can transform the process, go in a different direction and really start to head down the path.
Both of you have touched on a couple different solutions. Shifting from stop doing this and now set that baseline, but are there some specific treasury management solutions beyond, for example, Kim, the ACH piece that you described, that go hand-in-hand with optimizing the collection process or even speeding up collections? Any thoughts on that part of the equation?
Melissa Fellows:
Yeah, so I think I touched on maybe a little bit in driving your deposit to the bank. So a solution for check deposits would be a check scanner. They've been around I think since at least 2001, but it's a device that you have at your desk, and you run checks through, and it's as if you were bringing them to the bank. We're taking those checks as images and processing them so you can deposit when convenient for you at any time, and you don't have to get in the car and drive somewhere. Mobile is another option as well. So let's say you're not in the office but you have a large check that you want to get deposit... I mean time to money, right? So take a picture front and back and that's another convenient way to get check deposit to the bank sooner.
Kim touched on ACH collection. I think another solution would be lockbox outsourcing. Instead of having checks come to your office, have them go directly to the bank. So a lockbox is A P.O box. So if you're paying, let's say your charter bill and you're writing a check and it's going to a P.O box, that's going directly to Charters Bank. And so the benefit in having it go directly to your bank, it's secure, deposits are happening multiple times throughout the day. So another option to take that and have your bank process that payment for you so you don't even have to get the mail and make the deposit.
Kim Preston:
And to piggyback a little bit on some of what Melissa said in relation to the remote deposit, mobile deposit and lockbox, so the other side of the equation is thinking about is when you're getting that check or receivable into your account quicker, you have the use of those funds on a much quicker basis too. So in turn, that means it could be more revenue for you, it could be reducing the expense on your line of credit. So not only from an efficiency standpoint of not going to the bank, you're probably getting your funds into the account quicker than if running to the bank as well by check.
Kevin Kane:
Yeah, those are two great points and I'd like to come back to those solutions specifically in a few minutes perhaps, and think about what you're describing in a little bit of a different context as well. I think that the point around faster collections and having those funds available sooner, Kim, you just touched on it, those are things that maybe over the last two or three years weren't as meaningful, because rates were so very, very low, almost near zero. And so, the idea of advantages around collecting funds faster, putting them to work faster didn't maybe mean as much. Well now, whether it's interest that you might earn in an interest-bearing account or other investment vehicle, with rates now going up rapidly, that means a lot more. Alternatively, if you have cash available faster to reduce your borrowing on a line of credit, borrowing rates are going up as well. So things that might not have been front and center again over the last few years, I think are becoming more relevant today once again. So some great points there.
I want to talk a little bit about merchant services and this idea of, okay, accepting card as a form of payment. So can either of you or both of you talk a little bit about merchant services? How does that fit into the equation around optimizing or improving your collections process, and what some of the things are that a company should consider when thinking about whether to accept card as a form of payment from their customers?
Melissa Fellows:
Sure, I can start off. So merchant services is a partner that most banks partner with. It's not in all cases a banking solution, or if it is, it's under the bank holding umbrella. So we work with a merchant partner or have multiple partners where we will refer or direct clients to. But in considering credit card payment processing, think about the industry, who is your client base? I think of restaurants and retail for example. You have to accept credit card, because everyone accepts credit card, and it's a convenience in order to do business at those establishments. If maybe you accept larger dollar payments, but lower volume, accepting credit cards can be expensive. So just making sure that you're talking with a credit card provider to determine that you're collecting card information in an efficient, secure manner to lower the interchange rate to make it as cost effective as you can. And then if it's a new program for you, or in your invoice, think about what is my cost to accept this payment? And maybe you need to capture that in your invoice when you're billing your customer.
But I think most importantly, to think about will you be adding additional clients by being able to accept a credit card payment, and does it make it easier to do business? I also think of not-for-profits. So for example, a non-profit would want to accept credit card. Yes, it might be a more costly payment to accept, but you're going to be collecting additional donations that maybe you would not have otherwise had you not offered credit card as an option for your donors.
Kim Preston:
Yeah, to piggyback on that, there are some statistics out there in cases where credit card is used as an option for payments that people tend to spend more. So with that, card is becoming more prevalent even around businesses now as far as being able to make payments and so forth, because they can earn revenue and generate revenue on their end for using card. Virtual card is another thing that's coming into play. So I feel that having multiple options for your clients, how they can pay is a good thing. So while Melissa indicated there can be cost with adding the credit card piece, the merchant side, there's also going to be a benefit, because you're giving your client another option to look at, and maybe you generate more business because of that as well.
Melissa Fellows:
Okay, a couple more thoughts come to mind too. So your speed of payment; maybe you get your payment sooner by accepting a credit card, because let's say the funds are not available in a checking account. So instead of waiting a couple of weeks, for example, you get that credit card payment instantly. Also, insufficient funds; you're going to know right away a credit card is going to get declined, a debit card is going to get declined, whereas with a check, there might also be a fund's availability instance. And so, you're mitigating that by accepting a credit card payment.
Kevin Kane:
Makes sense. So what I'm hearing a lot of different advantages to considering card acceptance as a way to collect payments from your customers as a company. I also think something, Melissa, you started this topic out talking about an example, restaurants, retail stores where it's obvious that accepting cards as a form of payment, it's well established, it's probably the dominant form of payment. I do think there's an opportunity for B2B scenarios where card payments are absolutely an option and companies may not necessarily recognize or think that that could be the case.
One way maybe to bring that forward, there may be companies that are using card to pay their vendors; so in, again, a B2B scenario. So I think there is more to be learned or uncovered on that front, not just accepting, okay, well I'm a B2B type business, I don't sell things to consumer, and therefore card is not a viable option, when in fact it may very well be. And if you do begin to offer that as an option, there are a lot of advantages that the two of you have just spelled out.
What other best practices can you share around managing receivables more effectively? Is there anything so far that we've covered that you want to expand on or any suggestions or thoughts that you have on things we might not have touched on?
Melissa Fellows:
Think of instant availability or different transaction types, or different types of receivables, or assigned... or available maybe at different times. So example of that would be an incoming ACH to your account, or if you're going out and collecting funds via ACH, for most funds post to your account, they're immediately available for you. They're immediately available to wire out to begin earning interest. Or Kevin, as you were talking about earlier, being applied to a line of credit, for example, for saving an interest expense. So as much as you can direct electronically, it makes those funds immediately available, and can make reconciliation simpler, because less likely that something is going to come back insufficient, where there's a time delay, for example, with a paper check deposit. So as much as you can direct electronic, I think the better for your organization and better utilization of the funds well in your account.
Kim Preston:
And to add to that just from a workforce standpoint, automation, again, back to that efficiency side of the equation. The less time that your staff is working on posting checks to a GL and things of that nature, that automation comes into play. And while there's not hard dollars that you notice you save, there is a soft cost that you're saving because again, that workforce is more efficient, and they're able to use their time for other things besides processing deposits.
Kevin Kane:
Yeah, I think that's a well-established concept and it is, I like Kim, your word of automation. Our customers often talk about automation in the context, for example, of a manufacturing environment. And with challenges around recruiting and retaining employees, the equivalent of introducing some automation into the treasury or accounting function can allow you to do more, even in an environment where it's harder to get new teammates, or alternatively with the existing staff that you have to take on even more business without having to add incremental FTE. So that, to me is a really important point around this idea of automation, streamlining, moving away from paper and toward electronic solutions on the collection side of things as well.
And maybe that ties into this idea of how do you measure the return on investment for a more intentional focus on improving AR collections and procedures? So any thoughts, either Kim or Melissa, on that aspect of change in the collections environment?
Melissa Fellows:
No, I also think of reducing error. So by automating, lockbox would be a really good example of that where we're accepting your check deposit, but we can also help with reporting. And so we will work with our clients, determine what is the client account number, what is the client name, what is the information that you're looking for from a payment so that you can accept a file and automatically apply that to your accounts receivable system. So I think that there's additional value in error reduction by taking that human key element out of manually posting a payment.
Kim Preston:
Well, and even from a fraud perspective too, no manipulation of incoming payments, not to say that that's always going to be the case on the inside, but there's also less... the fraud risk is definitely mitigated less by the automation piece of it.
Kevin Kane:
Makes sense. Yeah, so security, reducing fraud, fewer errors straight through processing, again, elements that you can quantify the benefit hopefully to help establish the business case for doing something different. And maybe this is a good place to turn it around a little bit as well. We've been describing all of the great things that can come from evaluating your current practices on accounts receivable collection, the things that it helps within the company's environment in terms of efficiencies, staffing, those types of things. Let's talk a little bit about process changes or adopting new solutions can actually improve the customer experience for a company. So doing things that for a company's customers, making some changes could have some beneficial effects for their clients. Can we talk a little bit about what that might look like or sound like?
Melissa Fellows:
Yeah, or it could have negative effects, right? So you're a tech company, but you don't accept payments, for example, on your website. You're only paying by check or receiving check, for example. So definitely who is your client base, who do you want your client base to be, and creating a receivables process that aligns with your company's mission, and I think making it simple for them. And maybe an example of that would be thinking about a not-for-profit organization, and you want to make it easy for your donors to make a donation to your organization. So having a link on your website and being able to offer multiple payment options for your donors, again, to make that donation as seamless as possible. So I think just thinking about who you want, who is your client base and what's going to make it easy for them to either make a payment or to make a contribution.
Kim Preston:
Today's world, innovation is what it's all about too. If you're being innovative, that looks good from your client's perspective, that you are adapting to change, you are in the 21st century and doing things the way... moving forward, not always looking in the rear view mirror and processing the old way. So I think innovation, I mean that's what we strive too, as far as when we're talking to our clients, to be innovative, to bring new solutions, new ideas. Not that everything is going to work, but at least talking through those presents a positive image.
Kevin Kane:
Yeah, those are great points to make. And Kim, what you just touched on too is we talk a lot about at the bank offering optionality to clients. There are some clients that want to make a loan payment with a check perhaps, or they want to conduct business online, or they'd rather pick up the phone and talk to a real human being. And you want to be able to provide all those different alternatives so that folks can find the spot that makes the most sense based on their business, their familiarity or comfort. So I do think that the examples that you talked about are spot on.
And then, you start thinking, and Melissa, I think you sort of touched on this, but there's another aspect of it which has to do with the... not just the ease of use, but our customers migrating away from a company because they aren't offering other options, and so therefore, they feel like they want to find another partner or another provider. That's the part that's maybe a little bit more of a defensive decision. I think the other aspect of that is, how do you expand your market share or move into new areas or attract new types of customers that otherwise you wouldn't have gotten? And so I'll go back to the part of our conversation around card, by offering card as an option to some of your clients, does that expand your client base, and does it actually drive top line benefit, not just on the expense side in a way that we've talked about earlier? Any thoughts to add on that particular part of the equation?
Melissa Fellows:
I think you're spot on. I mean, thinking about who your demographic is and who you want your demographic to be. I keep going back to checks, but if you're accepting check only, if you're a certain age, you may have never owned a checkbook and don't own a checkbook. And I know anytime I have to mail a check in, it's always a scramble through the house to figure out where my checkbook is. So it's not convenient if you have to find your checkbook and write a paper check. And so it does, it goes down to, or gets back to the experience of who is your demographic and can you expand it by making it simpler and providing multiple options for varying receivables?
Kevin Kane:
Yeah, that's a really great point I hadn't thought about, just purely the demographic aspect. So as the demographics change, as folks that you're selling to may have a different perspective on how they want to conduct business, if you're not ready to flex with that or evolve with that, you could be left behind. And so, I wouldn't underestimate the risk associated with doing nothing and not being mindful of how your customer base and the decision makers that the companies that you sell to maybe looking for alternatives that feel better to them. So I think that that's a really, really good point.
Kim Preston:
And to add on that, Kevin, I mean having options as well, it's not a case where if someone decides they want to automate, they have to all at once, right? You can ease into it to test it out a little bit. Maybe you have a few key clients that you say, hey, I want to test this option out and get some feedback from them on how it works. So again, back to having several options, I think that's a positive.
Kevin Kane:
Terrific. And Kim, let's work with what you just touched on as well. And I would frame it this way, a customer, again, they should be looking to their bank and hopefully their bank is being proactive in this regard, but looking to their bank for ideas, best practices, new ways to run their treasury or accounting function. I can appreciate that it starts with what might we do different? We can certainly provide recommendations, but then in a very practical matter, once there's buy-in to taking another path. Can we talk a little bit about how can a bank partner help with these process changes? What are some of the things that you need to be thinking about to implement changes like this for a company that this isn't what they do day in and day out, it's an area where the bank should have some expertise? So how can we help get clients up to speed and put some of these new solutions in place?
Melissa Fellows:
I think it's different for every client, and it can vary a little bit too based on industry and what's realistic to shift towards. But I'll give an example. I'm working with an insurance company who receives a large number of paper checks and we're working on an electronic receivable strategy for them. And so what does that look like and where do we start? And so the starting point for this company is to collect premiums from policyholders with an ACH. And so to start, let's walk before we run. So where we're starting is any new policy holders that they're adding, or any renewals, making sure that it's an option, or on that setup form, there's an option to collect bank routing, bank account information. So you're migrating more receivables automatically to electronic for any new clients. And then there's going to be a point in time where you look at, okay, who's remitting, who's paying by check, is there an option to capture more of those payments electronically? So I think that would be an example of an industry where we see a lot of adaption towards electronic payments.
Kim Preston:
I mean, in theory we want to be an extension of your team. So we will work with you to help identify where processes could be changed or improved, and then we're going to help you with that. So it's not a case we're going to say, "Hey, you should do this," and you're on your own. We're going to work... be right there in the trenches with you and help you work through the changes, whether it's even helping train your staff, or the first run you do from an ACH collection standpoint, we'll work with you, and be a part of your team. I think that's a little where we set ourselves apart from that standpoint.
Kevin Kane:
Sure, and bringing some organization to the transition process, like a project plan, if you will, without over-engineering it. I don't want to overstate it, but the ability to say, here's who is going to do what, by when, and making sure that as part of that process, there's a pretty complete understanding about whether it's communication with their customers about new options, whether it's getting their staff to change some of their internal processes. I'm also thinking in terms of what sort of an accounting or ERP system do they have? So to the extent that we're moving potentially to an electronic solution, is there anything that needs to be considered in terms of file, formats or how that company's system can ingest the information so that you know who's paid me, how much have they paid me and what are they paying me for, so that we can take full advantage of the automation and the efficiencies that we were describing earlier on in our conversation.
Is there anything else that we haven't touched on from either of your perspectives, changes, approaches, ways to think about this? Anything else to be aware of or to avoid if we put ourselves in the shoes of the customer to think about moving forward with some of these ideas?
Kim Preston:
I think just being open to even hearing about other options, right? Again, there's no harm in at least just checking things out and finding out what there is available. So hopefully, your banker is having those conversations with you on a somewhat regular basis, because again, it's an ever-changing world. And so if you want to stay relevant, we need to adapt to those changes.
Melissa Fellows:
Yeah, absolutely.
Kevin Kane:
Melissa, final thoughts from you?
Melissa Fellows:
I'd say technology is always changing, continuing to talk to your banker. And in timing, we're all busy, but by reviewing, I think timing now more than ever is important just from, we talked about interest rates moving up, so there's savings, or there's dollars that you could earn by collecting and having a larger cash balance in your operating account. So I think timing, and just from an overall efficiency it's hard to find new employees as well. And so efficiency return, I think now is but as good of a time as ever to review your receivable strategy.
Kevin Kane:
Sounds good. And Kim, you had talked about the fact that whether it's your bank, your accounting firm, your attorney, all of these ideas, especially in the middle market where your bank is an extension of your team, I think that's a really critical, maybe last comment to make, is that any business, the folks that are leading those businesses, they've got their hands full, they're trying to run their companies, bring in new clients, there's a lot going on. And so to the extent that your banking partner can help you, A, be informed about different things that are out there, changes in technology, new solutions that could make your business more effective, more profitable, I think it really does start with that ongoing communication and just being open to different possibilities.
So I look at it, and I would say that's kind of a theme that not only in this podcast, but others that we've put together so far, that has really come through loud and clear, that we really view ourselves an extent as an extension of our customers organizations and are there to provide them with new ideas. So with that, I want to thank our guests for participating in today's podcast and thank our audience members for listening as well. And as my final thought, be sure to visit us at firstbusiness.bank to check out a number of other resources that we offer for business owners and leaders. And we invite you to experience the advantage with First Business Bank. And if there is any way that we can help or to start a conversation, we'd welcome the opportunity to do so. Thank you.