The impact of electronification on the income statement.

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

Saving a penny per transaction would be of slight interest to most readers and might not garner your attention. Conversely, the impact of electronification on the income statement (I/S) can be far more substantive for those seeking to drive significant bottomline benefits.

In the January/February issue, this column discussed the impact of electronification on the balance sheet and liquidity. This month's focus is on electronification's impact on the income statement. We will not explore here the nuances of different payment types, nor examine the various impacts of each. However, those should be kept top-of-mind when completing your electronification impact assessment. In preparing this assessment, some will take the further step and calculate the impact the I/S change will have on the company's valuation.

The following examines four prominent areas of impact:

1. Bank Charges. The tip of the income statement impact is the electronic/paper arbitrage opportunity for bank fees. According to Federal Reserve studies, paper methods continue to rise in cost, while electronic methods decline. From 1997 to 2002, the cost spread increased from around 1.6 cents to approximately 3.2 cents per transaction for Fed charges alone. This important benefit is typically the smallest of the four listed here.

2. Internal Costs. By moving to electronic payment and receipting methods, nearly all organizations will achieve greater efficiencies and lower costs with internal processes. Some examples:

   * One company moved receipt volume to Automated Clearing House (ACH) debit activity, allowing direct posting to its accounts receivable (A/R). Some steps in the paper process were completely eliminated (receive and load the lockbox file, resolve mismatch items from lockbox or in-house receipt, balancing in-house processing activity).

   * Various organizations moved their payables to electronic methods. Reconciliation time decreased greatly as electronic items settled on the day indicated, eliminating most outstanding items and abandoned property reporting work.

   Typically, internal cost improvements with electronification can be substantial and are best measured on an individual company basis. The Electronics Payment Association (NACHA) published a payroll ACH study in 1999 that showed total savings--including internal costs--of between $1.28 and $1.86 per payment.

3. Loss Reduction. Electronic items are returned faster than paper items in nearly all cases. All collection...