Avantgard Insights

www.sungard.com

TRANSFORMATION IN REMITTANCE
& AUTO-CASH PROCESSING:
Survey reveals high lockbox fees, low
productivity and a need for improved
accuracy are driving corporations
to adopt new technology
table of contents

2 Introduction

3 Study Landscape

4 Invoice Volume as an Indicator of Requirements

5 The Continuing Value of the Check

5 You’ve Got a Check

6 Delays in Posting

6 Lockbox Fees

7 Accuracy

8 Digital Remittance Capture

8 Productivity

9 Flexible & Sophisticated

10 You Are Only as Good as Your Matching Policy

10 Getting the Right Data…

11 Cash Applier Exception Queue

11 Managing the Exceptions

12 Conclusion
 Transformation in Remittance & Auto-Cash Processing 2

introduction
Today the processes many corporations rely on to obtain remittance data
and apply incoming payments have lagged significantly behind the rate of
technology—resulting in poor visibility and a lack of control over the accounts
receivable (A/R) environment. Many credit professionals struggle with cash
application or auto-cash processing systems that operate independent of the core
credit and collections operation. This results in a high cost structure, misapplied
payments and increased days sales outstanding (DSO).

Traditional approaches to the remittance function continue to include inefficient

manual steps and costly lockbox remittance re-keying fees which serve to inflate
the amount of time and expenditure truly required to receive and post a payment,
research exceptions and correct possible data inaccuracies. By taking measures
to automate and digitize the entire remittance data capture and cash application
process, a number of organizations have seen drastically reduced cycle times,
slashed operating expenses and created a more accurate, timely and effective
revenue cycle.

Read on to discover SunGard’s study findings regarding how many companies are
still managing remittance data by hand and how this is affecting their bottom line
in terms of cost efficiency, productivity levels and data accuracy rates.
3 Transformation in Remittance & Auto-Cash Processing

STUDY LANDSCAPE
SunGard conducted an industry study in the first half of 2009 that polled 101 finance
executives across a diverse set of industries. While the majority of responses were
derived from the industrial manufacturing sector (34%), consumer packaged goods
represented 15%, and chemical / pharmaceutical 9%.

The industries surveyed represent a vast customer base ranging from large retailers
to smaller “mom & pop” enterprises. Additionally, there is fairly wide range in terms
of company size measured in revenues. Due to the fact that companies with $1B or
greater in revenue tend to deal in much higher volumes of invoices, we will sometimes
break out the data to look at companies in two categories (above / below $1B USD).
 Transformation in Remittance & Auto-Cash Processing 4

Invoice Volume as Indicator of

Requirements
In order to fairly compare companies in the survey, or to benchmark yourself against
the responding companies, it is critical to look at the invoice volume in relation to
revenue. In the figure below, “Average Monthly Invoice Volume,” we look at the full
set of responding companies regardless of revenue size. The majority are in the 2
– 10K (29%) bucket. However, it is worth noting that 59% report volumes higher than
10K per month.

By comparison, if you look at companies with $1B or more in revenue, the invoice
volume for the majority (28%) jumps to 20 – 50K per month. An additional 26% have
invoice volumes beyond 50K monthly. These invoice levels represent a significant
difference. Once volume reaches 20K monthly, more processes are at risk, more
exceptions are indicated and the costs are significant.

While pain is evident regardless of company size, when revenues reach $500M - $1B
the costs become more significant and once the company exceeds $1B with over 20K
monthly invoices, there is a strong demand to find solutions to help mitigate some of
the larger issues, such as increased error rates, poor visibility and high costs.
5 Transformation in Remittance & Auto-Cash Processing

The Continuing Value of the Check

While we do see a steady migration away from checks toward ACH payments via
ePayment portals, there is still a significant amount of business being conducted
by check today. According to the Association for Financial Professionals, 74% of all
business-to-business payments are made by check regardless of the banking industry’s
initiative to move to electronic payments.

The ability to handle both check and electronic payments efficiently is going to be vital
for companies for the foreseeable future. As noted, “It is true that the paper check was
conceived in a different age…but as long as the check continues to serve the needs of
companies and consumers, the value of the check to the U.S. economy is not declining,
but growing.”1

Research firm Celent points out that companies are increasing their use of e-payments,
but the pace is extremely slow, encumbered by inertia as well as lack of integration
between accounting/ERP systems and payment systems, inadequate dissemination of
standards, lack of e-financial supply chain prioritization and/or resources (IT, human,
and financial), and insufficient bank-provided services. 2

You’ve Got a Check

So, after months of trying to collect on an invoice, the payment has been made, the
check truly is “in the mail” and indeed it arrives at your bank’s lockbox.

When a check is received, the envelope is opened and the check is scanned for
deposit. The check is then scanned again with the remittance data and is sent back to
the corporation, normally on a CD, for the corporations’ files. The remittance detail is
then re-keyed into files so that the data can be used for cash application.

Since this is a manual process, it takes time, translating to an increase in DSO (days
sales outstanding). Many companies are looking for ways to expedite this process in
order to reduce the lag in processing and applying cash.

The second area of concern is that the data sometimes contains errors or is incomplete.
Due to the fact that lockbox re-keying is often charged by keystroke (anywhere from
$.01 - $.005 per key stroke), many companies only obtain a portion of their remittance
data, leaving valuable information on paper and outside the process.

This missing information could help the corporation understand the payment – where
is it coming from? To which invoice shall I apply it? Is it covering multiple invoices? Is
there a short-pay? If there is a short-pay, what was the underlying reason and should it
be approved?

1
David Walker, October 2008, “What’s Next for Checks?” Digital Transactions
2
Bob Meara, July 2008, “Evolution of Wholesale Lockbox, Let the Good Times Roll!” Celent, pp. 7:9
 Transformation in Remittance & Auto-Cash Processing 6

Delays in Posting
Ideally cash is posted the same day it is received. However, the survey respondents
show that many times this is not the case. In fact, of companies under $1B in revenue,
23% are not posting for 2 or more days. For companies in the $1B or greater range,
this figure grows to 29%.

Lockbox Fees
However, beyond the lag in time to post and the lack of detailed remittance data to
assist in the auto-cash processing, the most perplexing component of this current
practice is the cost associated with the lockbox processing.

Of those surveyed, 74% reported some monthly cost associated with lockbox
processing, with 27% reporting a monthly cost of $10K or more. When you look at
those companies in the $1B + range, the costs jump to as high as $30K or more.

Of those companies with $1B + in revenues, 53% are reporting costs of $10K or more
per month, with 24% reaching levels of $30K or more.

“Faced with rising costs and economy driven softer shipping volumes,
companies like YRCW have learned to leverage technology not only to
improve operating margins but to enhance processing accuracy and to speed
the application of customer payments to clear open receivable dollars faster.”

- Kelly Kendall, Sr. Director of Revenue Management at YRCW

7 Transformation in Remittance & Auto-Cash Processing

Accuracy
Despite the high lockbox fees and the slow turnaround time for cash to post, the
biggest challenge continues to be accuracy of the applied payments, this is especially
true for those manually processing. Without the ability to associate payments with
enriched remittance data to help guide the application process, it is virtually impossible
to obtain a level of accuracy that is acceptable.

For many companies, banks are able to post at least 75% of incoming invoices from the
bank file; however there is no validation of data accuracy. Any misapplied payments
are not detected until later in the cash application process when they are more difficult
and expensive to fix and often only because a customer has complained. The remaining
invoices are posted manually, typically taking 1-3 days to ensure they are applied
accurately in the company’s legacy environments.

As such, most companies have staffed their organizations to manage the high number
of exceptions, back out misapplied payments and help sort out this mess. This is an
incredibly laborious task so it is no surprise that the second highest ranking challenge
is productivity.
 Transformation in Remittance & Auto-Cash Processing 8

Digital Remittance Capture

In comparison, companies can now take advantage of digital remittance processing.
Using this method, checks and remittance details are imaged rather than keyed. This
information is then digitized and extracted as text. The components of the remittance
advice and check are then entered as fielded data. Using templates and automated
learning intelligence, the system will get faster and more accurate as it processes
remittance from your most common customers.

Companies can eliminate keying costs and reduce labor by automating the extraction
of payment data from images of remittance documents. Proprietary technology that
associates payment and remittance data at the point of capture can offer the following:

• Point and Click Templating

• Intelligent Data Validation
• Flexible Electronic and Paper Workflow

Through the use of point and click templating, an operator captures the desired
payment and remittance data in a matter of seconds. Each time a future payment
from the customer comes in, the template is automatically recalled and applied. The
software also increases posting accuracy by matching the incoming data with existing
open A/R aging data at the invoice level. This feature not only increases the posting hit
rate but also the posting hit rate accuracy, thereby reducing the manual reconciliation
labor requirements.

Checks are imaged with remittance data. This information is then digitized
and extracted as text. The components of the remittance advice and check
are then entered as fielded data.

Productivity
Perhaps the most remarkable difference between companies in the less than $1B in
revenue category and the $1B plus, is the size of the organization assigned to sorting
out the massive task of associating payments with invoices as cash is coming in
the door.
9 Transformation in Remittance & Auto-Cash Processing

With an average of 29.3 FTE’s (for companies of $1B +) working to apply the cash and
sort through remittance data or backing out misapplied payments, companies are
spending an average of $1.4M a year in employee costs (based on a fully loaded cost
of 50K / FTE).

Combine this cost with the lockbox fees of 10 – 30K monthly and the cost of a 2
day lag in applying payments – thereby increasing your DSO. After looking at these
numbers, it is not a surprise that corporations are pushing for alternatives.

Flexible & Sophisticated

Auto-cash processing technology is not new, in fact, most of the time it is quite old.
Most utilities built to help expedite this process did nothing more than attempt to
mitigate some of the manual work. However, without sophisticated workflow the
systems actually created more work for the employees.

It is essential that multiple variables can be considered when applying a payment. Is

this for one invoice or does it cover multiple? Does this payment go across multiple
business units? Is there a short-pay? Is there an earned or an unearned discount
involved? The situation progresses to highly complex in a matter of minutes.

Survey respondents understand this as well. In fact, when looking at the primary
challenges, there is little differentiation between the first three in terms of weight.
Companies need to be able to adjust the matching policies, they need to create
unique and complex matching rules and manage strategic policies such as prompt pay
discount.

Prompt pay discounts can offer your organization an increase in cash flow, and lower
costs around the collections process, but if there is not a sound process in place to
manage this, you will quickly drive your costs up.
 Transformation in Remittance & Auto-Cash Processing 10

You are only as good as your

matching policy
The unique match threshold approach allows companies to develop and embed policy
to dictate how the system evaluates and applies remittance data. The rules engine
uses the policies to determine the most appropriate match, comparing remittance data
to outstanding invoices and data gathered from the collections workflow process.

It is critical that you can setup an unlimited number of cash application polices.
Matching policies, discount and write-off tolerances can be created for each customer,
group of customers, or for a specific business unit. You will then need to use the system
to track match rates of each batch and presents a detailed analysis of the effectiveness
of the configured matching rules. This allows companies to optimize algorithms for hit
rate accuracy and decreased manual processing.

Once the data has been captured and validated, a sophisticated cash
application solution can apply flexible matching algorithms; operating in
real-time with collections and dispute resolution. These solutions can work
with your ERP to reduce error, decrease manual processing and help avoid
misapplied payments.

Getting the right data…

The first key to improving your auto-cash process and technology is to use a solution
that accepts remittance information from multiple sources such as lockbox files,
Electronic Data Interchange (EDI), or bulk payment advice uploaded from customer
files or web sites.
11 Transformation in Remittance & Auto-Cash Processing

Remittance data is run through a configurable rules engine for automatic matching
or placement in an exception queue. The rules engine is the area in which most
companies find that their current technology lacks in flexibility & sophistication.

Sampling of questions to ask:

• Does it operate in real-time with collections/ deductions workflow?
• Can you configure the matching rules by business unit?
• Can you configure the matching rules by customer?
• Will it accept uploaded payment advice in any format?
• Can the solution automatically detect and generate deductions?
• Does it offer a single interface to multiple A/R systems?
• Can you process data from Lockboxes & EDI?
• Does it offer line item level processing and posting?
• Will it accept reason code level write-off tolerances?
• Are you able to track earned & unearned discounts?
• Is the bank data captured without duplicate entry?
• Will the solution automatically update the MICR table?

Cash Applier Exception Queue

For anyone looking to implement technology for the auto-cash process, it is essential
that you address the issue related to manual processing. In order to do this, there are
several key juncture points such as the lockbox re-keying and exception management.

Matching policies can be extensive and stringent and sometimes a match may miss
the mark by a slim margin. In these cases, the receipt will not be fully applied and the
results of the unmatched items will be presented in an exception queue for processing.

The exception queue holds invoices that were identified as potential matches but
did not meet the criteria established for a definite match. The unique self-learning
functionality also works to ensure that MICR / customer links are automatically created
once a receipt is applied from the exception queue.
 Transformation in Remittance & Auto-Cash Processing 12

Managing the Exceptions

Managing deductions swiftly is another component that is tied closely to the need
for sophisticated treatment of the auto-cash process. This is a component related to
exception processing. However, in these cases there are often earned or unearned
discounts that must also be managed.
Deductions are often first detected during the cash application process. AvantGard
Receivables capitalizes on this by integrating cash application with deduction
management to minimize revenue leakage by immediately assigning ownership and
evaluating the validity of the deduction. Using configurable rules, this technology can
automatically detect and assign ownership of deductions or adjustments taken, based
on customer, business unit or deduction reason.

CONCLUSION
As our research demonstrates, there are many pain points in today’s remittance capture
methods and auto-cash processing. These include high costs, manual inefficiencies,
delays in posting cash, increases in DSO and poor visibility into A/R and cash positions.

The transformations now taking hold in remittance and auto-cash processing alleviate
these pain points and brings these processes in line with advancements in technology.
Digital remittance data capture automates the manual process, increases accuracy,
allows for faster cash posting, decreases DSO and brings valuable data into A/R system
for better visibility. These benefits along with an appealing ROI will drive adoption of
this technology, further fueling the transformation that we are seeing in this industry.
www.sungard.com/avantgard

About Avantgard
SunGard’s AvantGard is a leading liquidity management solution for corporations, insurance
companies and the public sector. AvantGard provides chief financial officers and treasurers with
real-time visibility into cash flows and increased operational controls around receivables, treasury
and payments. AvantGard helps companies drive free cash flow and reduce inefficiencies across
the ecosystem of suppliers, buyers, banks and other trading partners. For more information, visit
www.sungard.com/avantgard

About sungard
SunGard is one of the world’s leading software and IT services companies. SunGard serves more
than 25,000 customers in more than 70 countries, including the world’s 25 largest financial ser-
vices companies.

SunGard provides software and processing solutions for financial services, higher education and
the public sector. SunGard also provides disaster recovery services, managed IT services, infor-
mation availability consulting services and business continuity management software.

With annual revenue exceeding $5 billion, SunGard is ranked 472 on the Fortune 500 and is the
largest privately held business software and services company on the Forbes list of private busi-
nesses. Based on information compiled by Datamonitor*, SunGard is the third largest provider of
business applications software after Oracle and SAP. Continuity, Insurance & Risk has recognized
SunGard as service provider of the year an unprecedented five times. For more information,
please visit SunGard at www.sungard.com.

*January 2009 Technology Vendors Financial Database Tracker http://www.datamonitor.com

© 2009 SunGard
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