Revamping a Cash Application System
You can't manage credit effectively if there are chronic delays in applying payments to customers' accounts. That was a problem this credit manager faced less than two years ago. Then she got the responsibility for reorganizing the accounts receivable function, and today cash applications are state of the art. The customer was really steamed. He insisted that his checks hadn't been properly credited to his account. What was going on, anyhow? Patiently, Sherri Razo brought up the checks and relevant invoices on her computer screen, and, while she still had the customer on the phone, faxed them to him. She got both a resolution of how to apply the checks and an apology. A year ago, Razo, who is director of credit for Quaker State Corporation (Dallas, Texas), could not possibly have resolved this problem this quickly or this well. When she took over responsibility for the Accounts Receivables function in March of last year, Quaker State had $32 million in unapplied cash. The reasons included a legacy cash application system so inflexible that automatic applications rarely reached 10% and the recent integration of two business units using different computer systems. Informed observers predicted it would take her at least three years to work out the problems. Undeterred, she set out on a three-step sequential improvement process:
- Reengineering all work processes from a cash-application standpoint.
- Upgrading the already available technology.
- Developing image-based technology totally new to Quaker State.
"At that time I calculated that we would need 35 full-time people to get and stay current," she recalls. "We had 10."But there were substantial efficiencies to be achieved through reengineering alone. Flow charts were developed to help reveal which cash application steps made sense and which did not. Some were eliminated entirely, and others were made more efficient. By the end of the reengineering process, Razo calculated that staff needs had dropped from 35 to 17. Moving on to upgrading the existing technology, she focused on the automatic application process and, specifically, on developing tools that would make accurate and reliable measurements possible. There were a myriad of different factors to be addressed, ranging from how to systematically allow discounts during the grace period to what to do about the chronic problem of customers dropping digits from invoice numbers. "We tackled these things one at a time," Razo recalls. "We didn't try to include all of the minor issues. But when we had addressed all of the majors we had reduced unapplied cash to $14 million and raised our automatic application rate to 55%." Imaging
Razo arranged a partnership with Quaker State's bank to develop imaging technology. Now the bank images each incoming check and the attached backup. In some cases the envelope is also imaged to confirm the cash discount is earned. The bank develops a CD of all images, which is sent to Quaker State by courier. "Our IT Department marries it together, giving us a lock-box application through SAP," she says. "The data transmission arrives at 2:30pm, and by 6pm is automatically applied to customers' accounts and closed out. In July we hit an average of 67%. We're now down to $4 million in unapplied cash, and we only need 10 people." What's more, the imaging system allows the credit staff to have immediate access to current payment information--in the form of copies of checks--in the Quaker State intranet. That was how Razo was able to deal so quickly and effectively with the irate customer mentioned above. "Disputes concerning checks have largely disappeared," she says, "because we always have access to actual images of the checks while we're talking to the customers. We expect the system to pay for itself within one and a half years." Additional benefits of the imaging system, she says, include:
- Fewer orders on credit hold
- Improved credit analyses and research since more than one credit staffer can work simultaneously on the same account.
- Better informed customer service reps.
"Most basic questions can now be answered by Customer Service," notes Razo. "That frees up credit people for more important responsibilities, like releasing orders from credit hold and making collection follow ups."Editor's Note: The above article originally appeared in the Credit & Collection Manager's Letter, a newsletter purchased by Credit Today in 2006. This article originally appeared prior to 2000.
| 
Webinars
