A “reverse lockbox” is a financial service offered by banks to automate the process of applying and posting incoming payments to outstanding invoices. While a traditional lockbox service is used to accelerate the collection and processing of accounts receivable, a reverse lockbox is designed to automate and expedite the accounts payable process.
Here’s a basic overview of how a reverse lockbox works:
- Invoice Receipt: When an organization receives invoices from its suppliers/vendors, these invoices are sent directly to a designated bank (or sometimes to the organization first, which then forwards them to the bank).
- Invoice Processing: The bank captures the invoice data (using scanning and OCR technology) and electronically transmits this data to the organization’s accounts payable system.
- Payment Approval: The organization reviews the invoices within its own system, matches them with purchase orders or receipts, and then authorizes payments.
- Payment Execution: Once payments are authorized, the bank receives the payment instructions and processes the payments on behalf of the organization, either through electronic transfers or by issuing checks.
- Reconciliation: The bank provides electronic reports back to the organization, allowing for easy reconciliation and record-keeping.
Benefits of a reverse lockbox include:
- Efficiency: Automated invoice processing can reduce manual data entry and errors.
- Faster Payment Processing: Payments can be executed quickly once the invoice is approved.
- Integrated Reconciliation: Automated reports can simplify the reconciliation process.
- Cash Management: Organizations can optimize their cash flow by scheduling payments to take advantage of payment terms.
While the reverse lockbox can provide efficiency and automation to the accounts payable process, it’s essential to ensure that the system integrates well with an organization’s existing accounts payable and procurement systems. It’s also crucial to maintain proper controls and audits to prevent unauthorized or fraudulent payments.
Example of a Reverse Lockbox
Let’s walk through a fictional scenario to better illustrate the concept of a reverse lockbox.
Example: TrendyApparel Co.
- TrendyApparel Co. is a clothing retailer with stores across the country.
- They work with hundreds of suppliers who provide materials, finished goods, and services.
- Due to the volume of invoices they receive, TrendyApparel Co. has occasional delays and errors in processing these invoices.
To streamline their accounts payable process, they decide to implement a reverse lockbox system with their bank, MetroBank.
Reverse Lockbox Process:
- Invoice Receipt: Suppliers of TrendyApparel send their invoices directly to a designated P.O. Box managed by MetroBank.
- Invoice Processing: MetroBank receives the invoices, scans them, and captures essential data like the supplier name, invoice number, date, and amount. Using OCR technology, the bank then electronically transmits this invoice data to TrendyApparel’s accounts payable system.
- Payment Approval: Inside TrendyApparel’s accounts payable system, staff members review the digitally received invoices. They match them against existing purchase orders and confirm that goods/services have been received. After the review, they approve the invoices for payment.
- Payment Execution: Once a batch of invoices is approved, TrendyApparel sends payment instructions back to MetroBank. The bank then processes these payments, executing electronic transfers or issuing checks to the suppliers as required.
- Reconciliation: At the end of each day or week, MetroBank sends a detailed electronic report to TrendyApparel, summarizing all processed invoices and payments. The retailer uses this report to reconcile its accounts payable records.
- TrendyApparel Co. significantly reduces manual data entry, minimizing errors and processing delays.
- Suppliers appreciate the faster payment processing, leading to better relationships and potentially more favorable terms.
- The retailer can more efficiently manage its cash flow by having a clearer view of its outstanding liabilities and upcoming payment dates.
This fictional example provides a step-by-step overview of how a reverse lockbox can benefit a company by automating and streamlining its accounts payable operations.