Accounts receivable conversion (ARC): How does it work?

Imagine Sarah, owner of a growing online boutique, drowning in a sea of paper checks. Each week, she spent hours manually logging payments, driving to the bank, and waiting for funds to clear. Cash flow was unpredictable, hindering her ability to invest in new inventory. Then, she discovers Accounts Receivable Conversion.

ARC promised to transform those cumbersome paper checks into swift electronic payments through the Automated Clearing House (ACH) network. The concept was intriguing, but the implementation felt like scaling a mountain. Sarah envisioned a seamless system that would liberate her from manual tasks, accelerate her cash flow, and integrate effortlessly with her existing invoice automation software.

This article is the map Sarah needed to navigate the journey of implementing ARC. It lays out a clear plan, step by step, highlighting the best practices within the ACH network. Along the way, it explores alternative payment avenues and details how ARC could integrate with her invoice automation system, promising a future of enhanced efficiency and accuracy.

What is accounts receivable conversion?

Accounts receivable conversion turns paper checks into electronic payments. Instead of depositing a physical check, you process it electronically through the Automated Clearing House network. This means funds move directly from your customer’s account to yours.

This matters for cash flow because it significantly speeds up payment processing. You get your money faster than waiting for checks to clear, reducing the time you’re waiting for funds to become available. For small and medium businesses, quicker access to cash can make a big difference in managing daily operations and investing in growth.

Key takeaways:

• Faster payments: Receive funds quicker compared to traditional check deposits.
• Lower costs: Reduce expenses associated with handling and depositing paper checks.
• Easier processing: Simplify your payment processing by converting checks electronically.

How accounts receivable conversion works

The ARC process typically involves scanning or manually keying in the check details. Once the data is captured and verified, an electronic transaction is initiated through the ACH network. This network is a nationwide electronic funds transfer system governed by NACHA (National Automated Clearing House Association) rules.

The ACH debit effectively withdraws funds from the customer's bank account and deposits them directly into the business's account. The original paper check may be voided and either stored securely for a specific period or returned to the customer as per the business's policy.

How ARC works in 6 steps

1. Check receipt: The customer mails or hands over a physical check to the business as payment.
2. Data capture: The business scans or manually enters the check details, including the routing number, account number, and check amount, into their system.
3. Verification: The system verifies the captured data for accuracy and ensures the check is eligible for ARC processing (first-party check, properly signed).
4. ACH transaction initiation: An electronic debit transaction is initiated through the Automated Clearing House (ACH) network. This debits the customer's account.
5. Funds transfer: Funds are transferred electronically from the customer's bank account to the business's bank account.
6. Check voiding/storage: The original paper check may be voided and either stored securely for a specific period (typically two years as per NACHA rules) or returned to the customer as per the business's policy.

How ARC solves 3 common SMB challenges

ARC offers solutions to several frequent challenges faced by SMBs, such as:

Too many manual tasks

By integrating an accounts receivable conversion system with Chaser automated email and SMS payment reminders, SMBs can significantly reduce the number of manual tasks associated with payment processing. 

ARC automates the conversion of paper checks into electronic transactions, while Chaser provides automated SMS reminders and email follow-ups for outstanding invoices. This combination minimizes manual data entry, tracking, and communication efforts, freeing up staff for more strategic activities.

Case study: Manual task reduction

An online boutique overwhelmed by manual check processing and overdue invoice chasing implemented ARC for electronic check conversion and Chaser for automated payment reminders. This integration significantly reduced manual data entry and time spent on collections, improving efficiency and saving an average of 15 hours per week (Chaser data,) allowing the business to focus on growth.

Slow cash flow

Implementing ARC expedites the processing of payments, significantly reducing the time it takes for funds to become available. 

When coupled with automated reminders from systems like Chaser, which encourage faster payments, the DSO (Days Sales Outstanding) is reduced. Lower DSO means quicker cash flow, allowing SMBs to better manage their finances, reinvest, and avoid cash crunches.

Case study: DSO reduced, and cash flow improved

An online craft supplies retailer improved cash flow by implementing accounts receivable conversion for faster check processing and Chaser for automated payment reminders. This resulted in reduced check clearing times, fewer overdue invoices, improved cash flow stability, a decrease in manual tasks, and a 76% reduction in DSO (Chaser data), leading to streamlined accounts receivable and enabling business growth.

Customer payment confusion

To address customer payment confusion, SMBs can leverage Chaser customizable reminder templates. These templates can be tailored to provide clear instructions and explanations about ARC processing and other payment methods. Clear communication reduces misunderstandings, increases customer trust, and ensures smoother transactions. 

Case study: Customer confusion eliminated

An online art supplies retailer faced customer payment confusion, particularly with check processing. They resolved this by implementing ARC and Chaser for automated reminders. Clear ARC notifications, customizable reminders outlining the process, and proactive communication reduced inquiries, sped up payments, and improved customer trust. This resulted in a streamlined payment process and increased customer satisfaction while also helping them get paid an average of 37 days sooner (Chaser Data).

How to identify ARC payments on your bank statement

To identify accounts receivable conversion payments on your bank statement, look for specific transaction details that indicate an electronic ACH debit originating from a check conversion. These details might include:

• Description: The transaction description may mention "ARC," "ACH Debit," "Electronic Check," or a similar phrase.
• Transaction type: Look for entries labeled as "ACH Debit" or "Electronic Funds Transfer (EFT)."
• Reference number: There might be a unique reference number or code associated with the electronic transaction that identifies it as an ARC conversion.
• Originator: The name of the business or merchant initiating the debit should be listed. Verify that this corresponds to a business you recently paid by check.

Accounts receivable conversion eligibility and requirements

ARC is beneficial for businesses looking to streamline their payment processing by converting paper checks into electronic transactions.

Eligibility

Businesses accepting checks as a form of payment can potentially utilize ARC. This is especially advantageous for small and medium businesses aiming to improve cash flow and reduce administrative burdens.

NACHA rules and requirements

NACHA (National Automated Clearing House Association) is the nonprofit governing body for ACH transactions. Here are some of the key requirements under NACHA rules for ARC:

• First-party checks only: The check must be drawn on the customer’s own account, not a third-party check.
• Check must be mailed/signed: The original check must be physically mailed or signed by the customer. This validates authorization for the transaction.
• Daily capture deadlines: There are specific deadlines for capturing and processing check information each day to initiate the electronic transaction. These deadlines vary and should be confirmed with your financial institution.
• Image retention (2 Years): Images of the converted checks must be retained for a minimum of two years to comply with regulatory requirements and for potential audits or dispute resolutions.
• Authorization: The customer's authorization to convert the check to an electronic transaction is generally assumed when they provide the check for payment. However, businesses should ensure clarity in their payment policies and disclosures to avoid disputes.

While ARC follows U.S. NACHA rules, businesses in the EU/UK can explore SEPA Direct Debits for similar check conversion.

Regulatory notes

• Regulation E: Primarily governs electronic fund transfers (EFTs) and consumer accounts. While ARC involves EFTs, commercial accounts are generally not subject to the same protections under Regulation E.
• Uniform Commercial Code (UCC): The UCC governs negotiable instruments, including checks. Aspects of check processing and conversions are covered by the UCC, which provides legal frameworks for financial transactions.

It is essential for businesses to work with their financial institutions to ensure compliance with both NACHA rules and relevant regulations.

Drawbacks and considerations

While accounts receivable conversion offers numerous benefits, businesses should be aware of its potential drawbacks and considerations. Careful evaluation of these aspects is essential before implementing ARC to ensure it aligns with the company's operational needs and customer expectations.

Initial setup effort

Implementing ARC requires initial effort to set up the system. This includes:

• Training staff on the new process.
• Integrating ARC with existing accounting software.
• Establishing necessary data capture and verification procedures.
  
  

Customer notification and objections

Businesses must notify customers about the transition to ARC. This can lead to:

• Potential objections or resistance from customers unfamiliar with or uncomfortable with the process.
• Need for clear communication to explain how ARC works and its benefits.
• Requirement to address customer concerns and provide alternative payment methods if necessary.
  
  

Inability to use on non-eligible checks

ARC cannot be used for all checks. It is restricted to:

• First-party checks only.
• Checks that are physically mailed or signed by the customer.
• Inability to process third-party checks through ARC.
  
  

Compliance needs

Compliance with regulations is crucial, including:

• Adhering to NACHA rules for capturing and processing check information.
• Meeting image retention requirements for a minimum of two years.
• Ensuring the business understands and complies with Regulation E and the Uniform Commercial Code (UCC).
  
  

Customer surprise and misunderstanding

Some customers may be surprised or confused by ARC, leading to:

• Potential disputes or complaints if customers are not adequately informed.
• Need for clear disclosure of payment policies to avoid misunderstandings.
• The importance of transparency in the payment process to maintain customer trust.

Accounts receivable conversion alternatives

While ARC offers significant advantages for converting paper checks to electronic payments, several alternative methods exist. These alternatives vary in processing speeds, fees, authorization requirements, and compliance considerations. 

Evaluating these options allows businesses to choose the most suitable payment processing method based on their specific needs and circumstances. The following section provides a comparative overview of ARC against other common payment processing methods, highlighting key differences and considerations for each.

Accounts receivable conversion implementation steps for SMBs

Here is a detailed guide for SMBs to get started with accounts receivable conversion :

1. Choose an ACH processor

• Research and compare ACH processors.
• Select a processor that meets your business needs and offers competitive fees.
• Establish an account and understand the processor's requirements.
  
  

2. Update invoicing templates

• Add a notification to your invoices indicating that checks will be processed via ARC.
• Include a statement about electronic debit from the customer's bank account.
• Provide contact information for any questions or concerns.
• Give customers a "heads up" on the first ARC-deducted invoice at least 30 days in advance.
  
  

3. Implement check imaging (On-premise or outsourced)

• Decide whether to scan checks in-house or outsource the process.
• If in-house, acquire the necessary equipment and software.
• If outsourcing, select a reliable service provider and establish a process for sending checks.
• Ensure compliance with image retention requirements (minimum 2 years).
  
  

4. Test a batch of checks

• Process a small batch of test checks to ensure the system works correctly.
• Verify data capture and accuracy.
• Check the speed and effectiveness of the electronic transactions.
  
  

5. Train staff

• Conduct training sessions for staff on the new ARC process.
• Cover data capture, verification, and processing steps.
• Address customer queries and potential objections.
• Provide ongoing support and resources for staff.
  
  

6. Monitor and refine

• Monitor the ARC process regularly for efficiency and accuracy.
• Collect feedback from customers and staff.
• Make adjustments to the process as needed to improve performance and customer satisfaction.

Accounts receivable conversion best practices

Implementing accounts receivable conversion offers significant benefits for businesses, streamlining payment processing, reducing costs, and accelerating cash flow. To fully leverage these advantages, a comprehensive understanding and application of best practices are crucial:

Automate importing of ARC debit files into your accounting system: enhancing efficiency and accuracy

Manual data entry is time-consuming, error-prone, and diverts valuable resources from strategic tasks. Automating the import of ARC debit files directly into your accounting system eliminates these inefficiencies. This integration provides numerous advantages:

• Reduced manual effort: Automation significantly decreases the workload on your accounting team, freeing them up for more complex and analytical responsibilities.
• Minimized data entry errors: Human error is inherent in manual processes. Automated import ensures data accuracy, reducing discrepancies and the need for costly corrections.
• Faster processing times: Automated systems can process large volumes of data quickly and efficiently, accelerating the posting of payments and improving overall turnaround time.
• Improved data visibility: Direct integration provides real-time visibility into incoming payments, allowing for better cash flow forecasting and management.
• Enhanced reconciliation: Automated data flow simplifies the reconciliation process between bank statements and your accounting records, making it easier to identify and resolve any discrepancies.

To achieve seamless automation, collaborate closely with your bank and accounting software vendor to ensure compatibility and proper configuration of data formats and transfer protocols. Regularly review and test the integration to maintain its effectiveness.

Keep a close eye on ACH returns: Proactive management of payment exceptions

Monitoring automated clearing house returns is a critical aspect of effective ARC management. Prompt identification and resolution of return items are essential for maintaining healthy cash flow and customer relationships.

• Real-time or frequent monitoring: Implement processes for monitoring ACH return notifications on a daily or intraday basis. This allows for immediate action on rejected payments.
• Categorization and analysis of return reasons: Understand the various reasons for ACH returns (e.g., insufficient funds, account closed, invalid account number). Categorizing and analyzing these reasons can reveal underlying issues that need to be addressed, such as data entry errors during customer onboarding or recurring payment authorization problems.
• Prompt follow-up with customers: Establish clear procedures for contacting customers regarding returned payments. This communication should be professional, informative, and aimed at resolving the issue quickly, whether it involves updating payment information or arranging an alternative payment method.
• Process for redeposit or collection: Define a clear process for attempting redeposit (if appropriate and allowed) or initiating other collection efforts for returned items. This process should comply with relevant regulations and internal policies.
• Trend analysis: Track trends in ACH return rates and reasons. Identifying recurring patterns can highlight areas for improvement in your ARC process or customer data management.

Leveraging reporting capabilities within your banking portal and accounting system can significantly aid in the efficient monitoring and management of ACH returns.

Schedule regular reviews of the ARC process: Continuous improvement and optimization

The ARC landscape, along with your business needs, can evolve over time. Regular reviews of your ARC process are crucial for identifying areas for improvement, ensuring ongoing efficiency, and adapting to changing circumstances.

• Frequency of reviews: Conduct comprehensive reviews at least quarterly, or more frequently if significant changes occur in your business, banking relationships, or regulatory environment.
• Cross-functional participation: Involve representatives from relevant departments, such as accounting, treasury, IT, and customer service, in the review process to gain diverse perspectives and ensure alignment.
• Key performance indicator (KPI) analysis: Track and analyze key metrics related to your ARC process, such as processing time, error rates, ACH return rates, and cost savings. These KPIs provide valuable insights into the effectiveness of your current processes.
• Process mapping and documentation review: Periodically review your documented ARC workflows to ensure they are up-to-date, accurate, and reflect current practices. Process mapping can help identify bottlenecks and areas for streamlining.
• Technology assessment: Evaluate whether your current technology infrastructure is optimally supporting your ARC needs. Consider potential upgrades or alternative solutions that could further enhance efficiency and security.
• Compliance review: Ensure your ARC processes comply with all relevant regulations, including NACHA operating rules and data privacy laws.

Regular reviews foster a culture of continuous improvement, allowing you to proactively address challenges and capitalize on opportunities to optimize your ARC operations.

Frequency of remittance processing runs: Maximizing cash flow

The frequency with which you run your remittance processing directly impacts your cash flow. Processing payments more frequently reduces the lag time between payment receipt and funds availability.

• Multiple daily runs: Aim to run remittance processing multiple times throughout the business day. This can significantly accelerate cash flow compared to a single daily run. Consider running processes in the morning, midday, and late afternoon.
• Factors influencing frequency: The optimal frequency will depend on factors such as your payment volume, the timing of your bank file receipt, your internal processing capacity, and your cash flow needs. Analyze your payment patterns to determine the most effective schedule.
• Benefits of increased frequency: More frequent processing leads to faster access to funds, improved cash forecasting accuracy, reduced outstanding receivables, and potentially better investment opportunities for surplus cash.

Evaluate your current infrastructure and resources to determine the feasibility of implementing more frequent remittance processing runs.

Ensure ACH details are consistently synchronized across all systems: Maintaining data integrity

Accurate and consistent ACH details are paramount for successful ARC processing. Discrepancies in account numbers, routing numbers, or other identifying information can lead to payment failures, delays, and reconciliation issues.

• Centralized data management: Strive for a centralized system for managing customer payment information. This reduces the risk of data silos and inconsistencies across different platforms.
• Data validation processes: Implement robust data validation processes at the point of customer onboarding and during any subsequent updates to payment information. This can include format checks, validation against bank databases (where available), and confirmation with the customer.
• Regular audits and reconciliation: Conduct periodic audits to compare ACH details across your CRM, billing system, and accounting software to identify and correct any discrepancies.
• Secure data handling: Ensure that all systems storing and transmitting ACH information adhere to strict security protocols to protect sensitive customer data and comply with relevant regulations.

Maintaining data integrity is crucial for minimizing errors, reducing administrative burden, and fostering trust with your customers.

Utilize a redeposit service with direct export to AR software: Streamlining exception handling

When ACH payments are returned, a redeposit service can automate the process of re-submitting eligible transactions. Choosing a service that offers direct data export capabilities into your Accounts Receivable software provides significant advantages:

• Automated redeposit attempts: The service can automatically attempt to redeposit returned items based on predefined rules, reducing manual intervention and improving the chances of successful payment collection.
• Seamless data integration: Direct export functionality eliminates the need for manual data entry of redeposit information into your AR system. This saves time, reduces errors, and streamlines the management of payment exceptions.
• Improved reporting and visibility: Integrated data provides a comprehensive view of redeposited items within your AR system, facilitating better tracking, reconciliation, and reporting on collection efforts.
• Enhanced efficiency: By automating the redeposit process and integrating data seamlessly, your team can focus on more complex tasks related to accounts receivable management.

When selecting a redeposit service, prioritize those that offer secure data handling, robust reporting capabilities, and seamless integration with your existing AR software.

By implementing these elaborated best practices and focusing on continuous improvement, your organization can maximize the success of its accounts receivable conversion process, leading to greater efficiency, improved cash flow, and reduced operational costs.

Accounts receivable conversion and invoice automation

Accounts receivable conversion is indeed a crucial component of a comprehensive faster payments strategy. While traditional check processing involves physical handling, deposit delays, and clearing times, ARC streamlines this by converting paper checks into electronic ACH transactions. This leads to quicker fund availability, reducing the time a business waits to access its cash, thus accelerating cash flow when payment arrives.

Combining ARC with automated payment reminders

Businesses can enhance their faster payments strategy further by integrating ARC with automated email or SMS payment reminders. Tools like Chaser facilitate this by automating reminders and follow-ups for outstanding invoices. Here is how they can be combined:

1. Proactive communication: Use automated email and SMS reminders to encourage customers to pay invoices promptly, even before they send a check. This reduces the likelihood of late payments and the need for extensive follow-ups.
2. Payment options: Within these reminders, offer multiple payment options, including the ability to pay online or through other electronic methods. This can reduce the reliance on checks and accelerate the payment process further.
3. ARC for incoming checks: When checks are received, use ARC to process them electronically, converting them into ACH transactions. This speeds up the deposit process, ensuring quicker fund availability compared to traditional check deposits.
4. Integrated systems: Integrate tools like Chaser with accounting software and banking systems. This integration allows for seamless tracking of payments, automated reconciliation, and efficient management of receivables.

The complementary roles of ARC and automated reminders

• ARC accelerates when money arrives: ARC speeds up the processing of checks into electronic transactions, reducing the time funds take to become available. It focuses on efficiency at the point of payment receipt.
• Chaser accelerates when invoices are sent: Automated email and SMS reminders prompt customers to pay promptly, influencing payment behavior before checks are even mailed. They encourage timely payment and reduce delays from the outset.

By combining these strategies, businesses can significantly improve their cash flow, reduce administrative burdens, and enhance overall financial management.

ARC and automated reminders as part of a faster payment system

ARC speeds up check processing by converting paper checks to electronic transactions, improving cash flow. Integrating ARC with automated payment reminders like Chaser further enhances this by encouraging prompt payment. 

Chaser accelerates payments at invoice sending, while ARC accelerates upon payment receipt. Combining both strategies significantly improves cash flow and reduces administrative burdens. Consider using Chaser to streamline payment reminders.

FAQs: Accounts Receivable Conversion

How do you calculate the conversion period of accounts receivable?

To calculate the accounts receivable conversion period, divide the average accounts receivable by the average daily sales. The average accounts receivable is determined by adding the beginning and ending accounts receivable balances for a period and then dividing by two. 

The average daily sales is calculated by dividing the total sales for the period by the number of days in that period. This calculation provides the average number of days it takes a company to collect its receivables, offering insight into the efficiency of its credit and collection processes.

What is the difference between ARC and BOC?

ARC and BOC (Back Office Conversion Entry) are both ACH transaction types used to convert paper checks into electronic debits. 

However, they differ in their initiation point. ARC is used when a customer physically hands over a check at a point of sale or mails it in, and the business converts it electronically. BOC, on the other hand, is initiated by a merchant who has received prior authorization from a consumer to debit their account. 

BOC is generally used for recurring payments or situations where a customer has provided their checking account details electronically or verbally.

What if a customer pays by check twice?

If a customer pays by check twice for the same invoice, it is essential to address the overpayment promptly. 

First, confirm that there are indeed two separate payments for the same invoice. Then, contact the customer to inform them of the double payment and explain the situation. Offer them options, such as issuing a refund for the overpayment or applying the extra amount as a credit toward a future invoice. 

Document all communication and the resolution to ensure accurate records.

How do I handle bounced checks under ARC?

When a check processed through ARC bounces (is returned), it is handled similarly to a traditional bounced check but within the electronic framework of the ACH. Your bank will notify you of the return, typically providing the reason (e.g., insufficient funds, account closed). 

Contact the customer immediately to inform them of the bounced check and request an alternative payment method. Follow your standard procedures for handling returned payments, which may include attempting to redeposit the check if permissible, adding fees, or initiating further collection efforts. Keep meticulous records of all bounced check incidents and communications.

What is account conversion?

Account conversion in the context of financial services refers to the process of changing an account from one type or format to another. This can include converting a paper check into an electronic transaction through ARC, changing a savings account to a checking account, or moving an account from one financial institution to another. 

Account conversion aims to streamline processes, improve efficiency, and provide better service or features to customers.

How to convert accounts receivable to cash?

To convert accounts receivable to cash, businesses need to collect outstanding payments from their customers. This involves sending invoices promptly, offering multiple payment options (including electronic methods), implementing clear payment terms, and following up on overdue payments. 

Utilizing accounts receivable conversion can speed up the process when payments are received by check. Offering early payment discounts, using factoring services, or setting up payment plans can also help accelerate cash collection. Efficient management of accounts receivable ensures a steady cash flow for operations and growth.

Is ARC secure?

Yes. ARC, processed through the secure and regulated ACH network under NACHA rules and regulations like Regulation E and UCC, is a secure way to convert checks electronically, provided businesses comply with requirements like image retention and secure data handling.