The impact of electronification on the income statement.

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 managers understand that the faster you know about a return, the better the collection rate. This translates to lower losses for electronic items.

Much has already been written about decreased losses by using check conversion to ACH for the initial payment and the return process. Importantly, an electronic return will often hit your customer's bank account days earlier than a paper item, improving your firm's collection rate and extending the advantage over paper. Savings from loss reduction typically dwarf the savings on bank fees and usually offer the second or third largest I/S benefit.

4. Liquidity Improvements. The column in the January/February issue discussed a $500 million company's liquidity improvements that impacted the balance sheet. This balance sheet benefit flows to the income statement through a lower cost of borrowing or a greater investment return. A one-time liquidity benefit would be valued at a short-term rate, while a permanent benefit would appropriately use a measure like the Weighted Average Cost of Capital (WACC).

The company in the example, which picked up three days of liquidity on the A/R side, with a 9 percent WACC, had a recurring annual improvement of $540,000 (note: does not factor in the tax impact). The seven-day day sales outstanding (DSO) improvement one firm experienced, and the opportunity on the accounts payable (A/P) side, would extend this benefit further. Savings from liquidity improvements typically offer one of the largest benefits to an organization.

The effective and proactive use of electronification can have a significant positive impact on a company's financial statements and processes. Adding up all of the impacts across the four categories noted above amounts to a substantial sum that can be added to your bottom line. What is the total impact likely to be? How will that effect the company's earnings per share (EPS) and overall valuation?

To realize those benefits requires both planning and execution. Assessing your company's readiness for electronification is the critical first step towards achieving exceptional results. Those who plan and act now will reap permanent and more significant benefits than those who passively wait.

Craig A. Jeffery is Managing Director of Strategic Treasurer LLC (www.strategictreasurer.com) in Atlanta. He can be reached at 770.632.5720 or [e-mail].