A Lean System for Cash Receipts (#137)
/In this podcast episode, we discuss a streamlined method for handling cash receipts. Key points made are noted below.
The Nature of a Lean System
I don’t think there’s an industry-standard definition yet for what it means to have a lean accounting system. So I’ll make up my own definition, which is doing accounting with minimal resources. Getting to minimal resources can be quite a trick. This is not a matter of just installing a best practice somewhere in the system and hoping that your cost structure gets better. Instead, you need to look at the whole process and figure out the exact spot where a system change leads to a lean system.
Cash Receipt Improvements
Let’s work through this from the perspective of cash receipts. Specifically, let’s look at creating a lean system for check receipts. Now I won’t get into the whole procedure for check receipts. Let’s just summarize the work flow. A check arrives at your business, and the mailroom staff opens the letter, does some recording of information, and then passes the check along to the cashier. This person does some more recording in the accounting records, and matches it to what the mailroom staff recorded.
Then the checks and a deposit slip go to a courier, who takes it to the bank. The bank tallies up the checks and provides a receipt, which is later compared to what the company recorded. That’s it.
So what we have is checks going through the hands of the mailroom staff, the cashier, the courier, and the person reconciling information at the end. That’s four people, and that’s four ways to screw up the process. So when you look at it from the perspective of too many people being involved, the obvious best practice to install is a bank lockbox.
With a lockbox, customers send their checks straight to the bank. The payments never come near the company premises. What does that do to the process?
Well, the mailroom staff is no longer involved. And there’s no courier. And there’s no one reconciling information, since there’s no information. Instead, all you have is the cashier looking up check images on the bank’s website each day, and recording the information in the accounting records.
That’s lean accounting. We’ve gone from four people to one. Now lockboxes have been around since about the time of Adam and Eve, so this is hardly new. The difference is that you’re thinking through the impact on the business before you figure out which best practice to install first.
Now let’s take this a step further. The objective is not really the lockbox itself. The objective is shrinking the check receipts process. And just installing a lockbox does not really meet that objective. The trouble is that there’ll continue to be a trickle of checks being sent straight to the company, not the lockbox.
So to be truly lean, you have to keep reminding customers to send their checks to the lockbox. And you may want to have the mailroom staff re-mail any incoming checks to the lockbox. And on top of that, maybe the only measurement you need for check receipts is a detailed listing of the cash that still comes through the business premises every day.
And it’s the job of the accounting department to follow up on every one of those cash receipts to make sure that they all go to the lockbox in the future.
So let’s get back to the concept of lean again. The objective is shrinking the check receipts process. You may realize now that just installing the lockbox doesn’t complete the objective. Instead, you have to do the installation, and then spend months going after every single check that still arrives at the business. As long as any check is processed within the company, you have not attained that objective, which means that the old procedure is still there, and you don’t have a lean process.
Now, what if someone says that lockbox fees are too expensive, and so don’t do it?
Well, there are other best practices that can still shrink the overall process, but it’ll still be longer than what you could do with a lockbox.
For example, you could install check scanning equipment, where you scan checks and basically e-mail a batch file of your deposits to the bank. Yes, this eliminates the courier, so the process is shorter. But checks are still moving through the company, and that means you still need to have a bunch of controls to monitor the checks.
Or, as another example, there tends to be a bottleneck at the cashier. This person may want to apply check payments to open accounts receivable, and wants to hold onto the checks until all of the cash is applied. If they have a problem applying cash, then they may not send a deposit to the bank. You can avoid this bottleneck by making photocopies of all the checks and applying cash from the photocopies. This allows the checks to be deposited faster.
Now these are two examples of ways to arrive at a somewhat more lean check receipts process. But the trouble is that you’re still accepting the fact that checks will be on the premises. And that’s the key item that has to go away.
So what do we get from this way of thinking? First up, consider the entire process flow to figure out which parts can be changed or eliminated. Then implement just those changes that allow you to alter the process. And then follow through over and over again to just beat up that implementation, so that you never have to return to the old system.
And doing it this way also means that you only have to install a relatively small number of best practices. To go back to my examples, if you revise checks receipts the right way, you only have to install the lockbox. Once there aren’t any checks running through the business, there’s no need to install check scanning equipment or make photocopies of checks.