• Do your customers mail payments to you?
• Are your customers dispersed across a region or the country?
• Do you hold checks over a day or two because your staff doesn¹t have the time to process them?
  

If so, you may want to consider the benefits of automated lockbox processing services.

Using lockbox banking is a cash flow improvement technique in which you have your customers' payments delivered to a special post office box instead of your business address.

The difference between this special post office box and a regular post office box is that only your customers' payments are delivered to the box. Instead of you picking up the payments, your bank's couriers have a key to the post office box, and they remove its contents and deliver your customers' payments to your bank. Your bank opens the payments and then processes the payments for deposit directly into your bank account. Depending on the nature of your business, the contents of your lockbox can be removed and processed once a day, or more often if required.

You can establish lockboxes in several different post offices or cities. A basic rule is that your lockboxes should be set up nearest to your customers to reduce the amount of time between your customers' mailing their payments and the deposit into your bank account.

Lockbox banking accelerates the payment and deposit portion of your cash conversion period in two different ways. First, lockbox banking cuts down on any postal delays caused by having your customers' payments delivered to your business address. Mail delivered to your place of business entails some extra sorting so that your mail gets into the hands of the correct carrier, not to mention the added time it takes the carrier to actually deliver it to your address. Second, using a lockbox shortens the amount of time necessary to process your customers' payments, by having your bank open the payment envelopes and deposit them directly into your bank account. Since the payment processing is done at the bank, your customers' payments are received and deposited all within the same day. Doing this work yourself can delay the deposit of the payments anywhere from one to two days depending on how long it takes you to process your customers' payments for deposit, and to actually make the deposit at the bank.

Lockbox banking is typically used by businesses that receive payments from numerous customers. Lockbox banking can be expensive but don't shy away from lockbox banking just because your business isn't as large. Many factors utilize lockbox banking to reduce cash conversion and speed up collections. The good news is most factors will incorporate the cost of the lockbox in the overall pricing so it is a win-win for clients! 

1. Learn the customer business practices that impact prompt payments, and eliminate barriers to prompt payment in your own processes. Partner with your customers toward developing best business practices toward effecting timely payments and alerting you of any issues in your organization that may adversely impact this.
2. Provide training across all departments that deal with customers to ensure understanding of company policy and objectives, in order to provide a consistent message to the outside world.
3. Implement a collaborative accounts receivable work-flow system with cross-trained staff so that any customer facing staff can initiate a solution when a customer calls about a payment, deduction, dispute, or credit related problem rather than delaying action with call backs and emails.
4. Use a credit and payment scoring model that triggers workflow actions; for example, at what point should you commence collection action? The scores should reflect credit risk, industry payment data, as well as your own experience with a customer.
5. Credit policy should be a tool used to expand company revenues as well as the customer relationship. In difficult situations, credit lines and payments can be worked out collaboratively with the customer, to achieve the objectives of both parties. This may require creativity on the part of the credit manager, and use of security, documentary and other credit management tools.
6. Be sure that collector performance goals are written down and that staff are held accountable for their results. The goals should be in sync with those that drive senior levels of management, but focus on more targeted metrics to draw team concentration to what’s important.
7. Automate the identification of delinquent accounts based on customer credit rating/ payment histories or customer class. This allows you to more efficiently manage the company's accounts receivable investment.
8. There is only so much time, so you must prioritize collection activities. Whether triggered by predictive payment scoring systems, or by manual ledger review, organize and plan your collection targets toward outcomes that will provide the highest return. This prioritization must be by employee as well, as some are better suited for volume collections as opposed to complex collections. Don’t shy from using collection outsourcing companies or agencies. While they will charge for their services, the alternative may be poor collections, higher borrowing, and bad debt write offs.
9. If you are experiencing an unacceptably high level of bad debts, perhaps your credit processes are inadequate to the task. Turnkey solutions to this include credit and collection outsourcing, or even factoring. Another possibility is credit insurance, although a credit insurer will also require that you implement effective credit controls and policies.

The cash conversion cycle (CCC) is one of several measures of management effectiveness. It measures how fast a company can convert cash on hand into even more cash on hand. The CCC does this by following the cash as it is first converted into inventory and accounts payable (AP), through sales and accounts receivable (AR), and then back into cash. Generally, the lower this number is, the better for the company. Although it should be combined with other metrics (such as return on equity and return on assets) it can be especially useful for comparing close competitors because the company with the lowest CCC is often the one with better management.

What is CCC?
The CCC is a combination of several activity ratios involving accounts receivable, accounts payable and inventory turnover. AR and inventory are short-term assets, while AP is a liability; all of these ratios are found on the balance sheet. In essence, the ratios indicate how efficiently management is using short-term assets and liabilities to generate cash.

How do these ratios relate to business? If the company sells what people want to buy, cash cycles through the business quickly. If management cannot figure out what sells, the CCC slows down. For instance, if too much inventory builds up, cash is tied up in goods that cannot be sold - this is not good news for the company. In order to move out this inventory quickly, management might have to slash prices, possibly selling its product at a loss. If AR is handled poorly, it means that the company is having difficulty collecting payment from customers. This is because AR is essentially a loan to the customer, so the company loses out whenever customers delay payment. The longer a company has to wait to be paid, the longer that money is unavailable for investment elsewhere. On the other hand, the company benefits by slowing down payment of AP to its suppliers, because that allows the company to make use of the money for longer.

What goes into calculating CCC, let's take a look at the formula:
    CCC = DIO + DSO - DPO

Let's look at each component and how it relates to the business activities discussed above.
Days Inventory Outstanding (DIO): This addresses the question of how many days it takes to sell the entire inventory. The smaller this number is, the better.
    DIO = Average inventory/COGS per day
        Average Inventory = (beginning inventory + ending inventory)/2

Days Sales Outstanding (DSO): This looks at the number of days needed to collect on sales and involves AR. While cash-only sales have a DSO of zero, people do use credit extended by the company, so this number is going to be positive. Again, smaller is better.
    DSO = Average AR / Revenue per day
        Average AR= (beginning AR + ending AR)/2

Days Payable Outstanding (DPO): This involves the company's payment of its own bills or AP. If this can be maximized, the company holds onto cash longer, maximizing its investment potential; therefore, a longer DPO is better.
    DPO = Average AP / COGS per day
        Average AP = (beginning AP + ending AP)/2

What Now?
As a stand alone number, CCC doesn't mean very much. Instead, it should be used to track a company over time and to compare the company to its competitors.
When tracking over time, determine CCC over several years and look for an improvement or worsening of the value. CCC changes should be examined over several years to get the best sense of how things are changing.

The cash conversion cycle is one of several tools that can help you evaluate management, especially if it is calculated for several consecutive time periods and for several competitors. Decreasing or steady CCCs are good, while rising ones should motivate you to dig a bit deeper.