The impact of electronification on the balance sheet.

• Author: Jeffery, Craig A.
• Position: Treasury

While it's not in the dictionary, the word "electronification" has been used in financial circles for years. With several new and significant payment options available, the following definitions of terms can provide readers with common ground for discussing the impact of electronification on financial statements:

Electronification is the movement or conversion of information and/or funds through electronic means. This includes the following payment types:

Direct Payment includes direct deposit, direct payment and financial electronic data interchange. These use the Automated Clearinghouse (ACH) to settle funds and move payment information.

Truncation: Check21. This allows banks to submit image replacement documents (IRDs) in lieu of checks for clearing.

Conversion. A check is converted to ACH transfers at either the retail counter or at a lockbox, thereby becoming a document used to create the payment.

Thoughtful financial professionals take a broad view when assessing the impact of electronification on their organization. The total impact is significant, as it includes financial, customer and vendor opportunities and process changes. The following focuses on the balance sheet; a future article will highlight the income statement. These are overlapping areas, since improving the balance sheet may also improve the income statement.

Working Capital and Liquidity

Electronification targets a few areas of traditional cash management float (mail, processing and availability), and often indirectly benefits other order-to-receipt float and process components. The dual perspective of the treasurer and controller is required in order to secure optimal balance sheet benefits.

* Float Impacts. Let us call a truce between the warring factions of treasurers and controllers. Treasurers may focus solely on liquidity, while controllers might exclusively view cash from a generally accepted accounting principles (GAAP) reporting perspective. This difference is evident when a paper payment is received in-house. From an accounting perspective, the entry relieves accounts receivable (A/R) and increases cash today. Those funds may not be available for use for three days and are not liquid, according to the treasurer. Balance sheet measures, such as days sales outstanding (DSO), use point-in-time accounting measures, which are easily captured and reported but are not completely sufficient for liquidity planning.

The controller sees no difference between a paper...