The 411 on Lockboxes
Expediting Cash Flow, Enhancing Security
and Building Efficiency
The lockbox: It started in the 1940s
as a way for banks to be first in line to
access cash coming into companies
that owed them money. Since then it has
evolved into a means for businesses
to expedite their cash flow, reduce
fraud, automate the flow of remittance
data, and enable staff to take on more
strategic responsibilities.
This is especially true for companies that receive
payments from other companies. While consumerto-business payments are moving away from checks
to cards and Automated Clearing House (ACH)
transactions, business-to-business payments still
are predominantly made via check, especially for
businesses with revenue ranging from $10 million to
$50 million. And because B2B payments typically
are higher in value than those made by consumers,
companies are concerned about making sure those
payments are processed and credited to their
accounts quickly, with payments posted to their
accounts receivables system. Most sophisticated
lockbox services can do that the same day the
payment is received, but there’s much more lockbox
services can do for growing businesses.
Improving Cash Flow,
Efficiency and Data
Quality
No matter its size, every company is looking
for ways to drive profitability by expediting the
flow of cash into the business so it can put the
cash to use sooner. Most up-to-date receivables
lockbox services offer same-day credit on
payments received. Coupled with an advanced
payables lockbox or disbursement service,
the comprehensive data the company receives
enables it to examine cash inflows and outflows
and more efficiently invest unencumbered funds.
Driving profitability also comes from making sure
employees are working efficiently. Instead of an
employee driving to the bank or entering payment
data, a lockbox allows that employee to take on
more valuable responsibilities, such as billing,
handling collections or serving customers. For
those companies using armored carrier for check
deposits, cost savings may be incurred.
Accounting accuracy and ensuring customer data
remains current also are benefits of lockbox services.
Richard J. Poje, pages 58-63, AFP (Association for Financial Professionals) Exchange, March/April 2003.
“Payables and Receivables at Mid-Size Companies: The Not-so-Forgotten Middle” Aite Group LLC Report, September 2012. 1
2
Having computers do the work reduces data entry
errors. In addition, customer inquiries, comments or
changes to personal information are captured and
transmitted the same day they are received.
Other benefits provided by state-of-the art lockbox
services include:
• Less vulnerability to internal theft because there
is a separation of duties between those who issue
invoices and those who receive payments.
• Reduced dependence on paper and access
to the larger digital storage capabilities of the
bank. Some companies use the imaging services
and digital storage features of the lockbox to
retain digital copies of contracts or corporate
documents.
• Better protection of the company’s financial
information because it’s stored behind the bank’s
network, which oftentimes is more sophisticated
in blocking attempts to breach information
security.
• For select industries sensitive to reductions in
the purchase to pay cycle, such as supply chain
manufacturers, same day lockbox processing with
automated posting accelerates the receivables
process, reducing a company’s outstanding
invoices and enabling it to more expeditiously
pursue additional sales.
Expediting Billing and
Receiving Processes
There are two kinds of lockbox services: retail and
wholesale. Retail is designed for consumer-tobusiness payments; wholesale is for B2B payments.
Either way, the state-of-the-art receivables lockbox
service involves the following:
• The bank collects the remittances from the
post office box at frequent intervals throughout
the business day, and the envelopes’ contents
are extracted on automated equipment. Retail
lockbox customers are sent Optical Character
Recognition (OCR) scannable remittances to
accompany payments they mail directly to the
designated post office box. The OCR information
includes the customer’s account number and
payment amounts that are scanned to validate
and report the payments.
• The contents are fed through a high-speed
scanner that captures images of the pieces, such
as the remittances and checks, and converts and
digitally stores account number, payment amount
and other information from these images
• The scanned images are made available to the
company’s accounting staff for viewing through
a secure online portal, while the data from those
images is configured for a posting file or similar
format that is transmitted to the company’s
account receivables application.
The 411 on Lockboxes: Expediting Cash Flow, Enhancing Security and Building Efficiency
cadencebank.com
Extending Lockbox
Technology to Other
Financial Management
Needs
While lockbox services have advanced significantly
in recent years, enhancements continue to be
made. Companies today are seeking increased
efficiencies, and to answer those needs, banks with
lockbox expertise now are offering payables lockbox
solutions. Migrating from a paper-based accounts
payable system to an electronic database with
online routing for payment approvals streamlines a
business’ invoice-to-pay process, whereby:
• Client businesses have their vendors send
invoices to a designated post office box, or
emailed or faxed directly to the bank.
• The bank picks up the invoices, scans them and
enters essential information such as vendor
name, invoice number, invoice amount and other
pertinent information requested by the client.
• The images are electronically routed to the client
in a secure manner, who applies the general
ledger and cost center accounts from which each
invoice should be paid, and approves or denies
invoices for payment.
• Approval data is retained by the online banking
system, and upon authorization, the system
automatically creates output payment files that
produce the payments according to the client’s
instructions (e.g., by check or ACH). The bank
uploads positive pay files automatically for fraud
prevention.
• Nightly files are integrated back to the client’s
accounts payable system for updated financial
statements.
Outsourcing the payables process is providing
benefits similar to those associated with outsourcing
the receivables process: cash flow moves smoothly,
companies avoid penalties for late payments,
and business owners and their employees can
concentrate on building business, not handling
clerical tasks.
Forward-thinking institutions are implementing
other refinements of lockbox services. For example,
Cadence Bank is simplifying the chargeback process
for non-sufficient funds returns. Previously, when
a customer payment was made from an account
without sufficient funds, the client did not receive
the NSF alert until the day after processing. The
client had notice to then make a manual entry of
the chargeback. Cadence has created a way to
provide client companies with advance notice of
the chargeback with a reverse lockbox-posting file,
eliminating the need for the client to manually enter
the chargeback and thereby creating efficiencies
for the client.
The 411 on Lockboxes: Expediting Cash Flow, Enhancing Security and Building Efficiency
cadencebank.com
Identifying the Right
Lockbox Servicer
Companies with more than $10 million in revenue
and an average of at least 100 payments a
month are prime candidates for lockbox service.
Finding the best provider logically starts with the
company’s current bank. However, if that bank
has not grown as the company has grown, it may
need to form a relationship with an innovative,
more progressive bank – one that has a dedicated
treasury management consultant and local lockbox
processing.
The search for a lockbox provider should start
with considering banks in the company’s primary
geographic market. One that also services any
secondary markets in which the company operates
is even better. Ideally the lockbox service should be
located close to the company’s customers so that
payments can be received within a few days
of mailing.
In addition, the company needs a lockbox provider
that understands its business and cash flow needs,
and makes best practice recommendations. Other
things to look for include:
Comprehensive Services – In addition to a
receivables lockbox, the lockbox provider should
offer the full range of treasury or cash management
services, such as payables lockbox or disbursement
services, remote deposit capture, fraud protection,
electronic banking, and merchant services.
Technology – The company’s financial managers
should tour the potential provider’s lockbox
operations and focus on how the equipment works.
It should be highly automated, in good working
condition and performing properly. The lockbox
service also should offer online access to the
company’s data, preferably through a portal that
requires only a single sign-on to all the treasury
management tools the company uses.
Timely &
The company needs
Customized
a lockbox provider
Reporting – As
the whole idea
that understands its
of a lockbox is to
business and cash
expedite cash flow
and streamline
flow needs, and
processes, the
makes best practice
company will
recommendations.
want same-day
processing and
reporting in a format that is customized to its internal
accounting system. Early lockbox software platforms
dictated the format, making it necessary for many
clients to expend IT resources to convert reports
to other formats. The latest lockbox systems allow
for customization, making it easier to integrate the
lockbox data with the company’s accounting system.
Data Storage & Security – The company should
expect a provider that will offer enough data
storage capacity for the long term. State-of-the art
lockbox services can archive at least seven years
of data, including scanned images of remittances.
The provider’s internal controls for keeping data
secure also should be reviewed, along with disaster
recovery policies.
Lastly, the company will want to know the fee
structure of the lockbox service, keeping in mind
that the cost of such services will be much lower
than the cost of using skilled employees to manage
administrative tasks. Furthermore, many businesses
find that Account Analysis, a cash management
service that applies an earnings credit on the
collected balances in all the company’s accounts,
may offset lockbox and other service fees.
More and more banks are offering lockbox
services, but not all are created equal. Important
characteristics to look for in a provider are extensive
treasury management expertise, a culture of
innovation and service, and a true understanding of
your company’s needs.
The 411 on Lockboxes: Expediting Cash Flow, Enhancing Security and Building Efficiency
cadencebank.com