What it means
ARC sits inside the collections process, usually at a lockbox or in a company's own mailroom. Incoming cheques are scanned, the routing and account numbers are read from the bottom of the document, and an electronic debit is created against the payer's bank account.
The paper is then destroyed or archived, because the electronic entry is the instrument that actually collects the money. The business case is cash timing and cost.
Paper clearing can take several working days and involves couriers, deposit slips and manual banking, while an electronic debit typically settles within one or two business days at a fraction of the cost per item. For a company receiving thousands of cheques a month, the saving shows up in both bank charges and days sales outstanding.
There are conditions attached. The payer must be given notice that cheques may be converted, usually printed on the invoice or remittance slip, and certain items cannot be converted at all, including cheques above a set value and anything drawn on a non-participating account.
Any item that fails the rules is returned to the paper process. Operationally ARC changes the control environment more than people expect.
The scanned image becomes the evidence, so image quality, duplicate detection and retention policy all become finance controls rather than technology details. Segregation between the person opening the post, the person scanning and the person posting cash to the ledger still has to hold.
A useful way to think about ARC is as a bridge technology. Its real value is in markets where cheques remain common, and it loses relevance as customers move to bank transfers, direct debits and card payments.
Many finance teams run ARC while actively moving customers onto electronic payment, and measure success by the falling number of items converted.
In practice
Real-world examples.
Example
A wholesale builders merchant converts the 2,600 cheques it receives each month at a regional lockbox. Cleared funds arrive two days earlier, which lets the finance team cut its agreed overdraft limit by $150,000. The paper is imaged and retained for seven years in line with the retention policy.
Example
A property management firm collects monthly rent by cheque from 900 tenants. ARC removes a weekly trip to the bank and gives the credit control team same day visibility of who has paid. Returned items are flagged automatically and chased within 24 hours.
Example
A utility adds a notice to its remittance slip saying cheques may be processed electronically, then converts every qualifying item. Corporate cheques above $25,000 are excluded by the scheme rules and continue through the paper process. The exclusion list is reviewed with the bank every six months.
Formula
Calculation
ARC is justified with a straightforward saving calculation:
Annual Saving = (Items per Year x Cost Saved per Item) + (Average Daily Receipts x Days of Float Saved x Cost of Money)
A distributor receives 4,000 customer cheques a month, which is 48,000 a year. Manual processing and paper deposit cost about $1.20 per item, and converted items cost about $0.45, saving $0.75 each. The processing saving is 48,000 x $0.75 = $36,000 a year.
Those cheques carry an average of $2,400,000 a month, which is $28,800,000 a year, or about $80,000 per calendar day. ARC shortens clearing by two days and the company funds its working capital on an overdraft at 9%, so the float saving is $80,000 x 2 days x 9% = $14,400 a year.
Total annual saving = $36,000 + $14,400 = $50,400. Against a one off scanner and software cost of $30,000 plus $9,000 a year of support, the net saving of $41,400 in year one pays the investment back in under nine months.Case study
Seen in the real world.
Meadowgate Supplies is an illustrative, fictional plumbing wholesaler used here to show the mechanics. Meadowgate took in roughly 3,500 cheques a month across four branches, each branch banking its own takings, and the finance team routinely waited five days to know whether a customer had paid. Credit limits were being released late, and two large orders had been delayed because a customer who had paid in full still showed as over limit.
The finance manager centralised incoming post to head office and introduced accounts receivable conversion with scanners at a single point. Cheques were converted the day they arrived, cash was posted to the ledger the same afternoon, and credit limits refreshed overnight. Bank charges fell by about $2,100 a month and two half time banking runs were redeployed to credit control.
The unexpected benefit in this fictional case was control rather than cost. Duplicate detection in the scanning software caught a cheque that had been presented twice, and the image archive settled three customer disputes in minutes that would previously have taken a week of letters.
Watch out
Common mistakes.
- Converting cheques without telling the payer first. Schemes require clear prior notice, usually printed on the invoice or remittance advice.
- Keeping the paper cheque after conversion and banking it as well. The electronic debit is the collection instrument, and presenting both creates a duplicate the customer will reverse.
- Treating image quality and retention as a technology matter. The image is the audit evidence for the receipt, so legibility and retention are finance controls.
Questions
People also ask.
Does accounts receivable conversion speed up collection from slow payers?
No, it only speeds up clearing once a cheque has arrived, and getting the cheque sent on time remains a credit control question.
Which items cannot be converted?
Typically cheques above a scheme value limit, certain corporate and government items, and anything drawn on an account that does not participate in the electronic scheme.
Is ARC still worth implementing as cheque use declines?
It is worth it where volumes are still in the hundreds or thousands each month, and the sensible plan is to run it while actively migrating customers to electronic payment.
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