Getting Cash Faster

September 1, 2005       Don McNamara      

An integral part of the office equipment for the Christian Children’s Fund (CCF) in Richmond, Va., is a desktop scanner.

Scanners may not be anything new for office work, but this piece of equipment is not scanning and recording memos or letters. According to Bill Hopkins, treasurer of CCF, all checks received in house are scanned and an image created.

Converting checks to cash and recording the gift happen faster every day. Cash is king and a check is worthless until it is converted.

“We create a file that we transmit into our donor management system,” said Hopkins. He added that checks received in-house are scanned and that scanned checks are stored in an image database.

This method of processing checks electronically is one that has

been made possible by a combination of advanced technology and the passage of Check 21, a federal law that became effective in October, 2004. According to information available on the Federal Reserve’s Web site, Check 21 allows banks to capture a picture of the front and back of a check along with the associated payment information and transmit this information electronically. Many donors are making payments online these days, but there are still many who are more comfortable sending in a check. As welcome as the money is, checks still present logistical problems, and innovations such as check scanners are helping to lessen or circumvent those problems.

In addition to the checks that CCF handles directly, it receives many that are collected by an outsourced processor. In the case of CCF, this is Media General, an independent, publicly owned communications company, also headquartered in Richmond, with interests in newspapers, television stations and interactive media. Media General is authorized to pick up checks received at CCF post office boxes.

Hopkins said that Media General had worked to expedite its own check-collection system and had excess capacity after it sold off its cable business.

Every day, Media General makes images of the checks it receives. “They will prepare a deposit and send all the checks to our bank,” Hopkins said. “They give us a CD-ROM with the images on it. We then take the CD-ROM and upload the images into our database.”

Hopkins said that the arrangement between CCF and Media General amounts to what would be traditionally thought of as a “lock box.”

The term lock box refers to days when someone put a check into a box that literally was locked and could not be opened without a key. With a modern-day lock box, checks that are mailed go directly to a bank instead of to a nonprofit, even if the nonprofit’s name appears on the envelope.

Another form of a lock box, the one used by CCF, has envelopes going to an outsourced agency that deposits the money in the organization’s domiciled bank.

According to Bob Mims, chief financial officer of Ducks Unlimited in Memphis, that is how contributions for his organization are handled. In addition to speed, it offers the organization better oversight.

“It’s high volume in a centralized location and you have better control because it’s coming into a funnel, so to speak, rather than a decentralized procedure,” Mims said.

A lock box can also be beneficial to nonprofits that are concerned about the proper separation of duties within the organization of who receives and opens incoming mail, who separates and records checks and who takes checks to the bank.

Although speed is an attraction for financial officers, John Zietlow, a professor of finance at Malone College in Canton, Ohio, and instructor of a Web-based course on nonprofit financial management for Indiana University Purdue University Indiana, cautioned that banking executives are not convinced that the effects of Check 21 will be as dramatic or immediate as some media reports have suggested.

Hopkins offered the same caution. “I don’t think it saves time over a deposit,” Hopkins said. “The clearing process is the same.” While downplaying the issue of speed, he praised the scanning system for efficiency and security in handling money.

Andrew Lang, a CPA and consultant to nonprofits in Potomac, Md., said the fastest way to convert donations into cash is to have an Automated Clearing House (ACH) arrangement, whereby the donor agrees to have a certain amount of money deducted from his checking account.

An ACH transaction is similar to direct deposit of a paycheck into an employee’s checking account or to PayPal or similar payment services used by online auction services.

“The problem with ACH is that donors can be reluctant to have automatic transfer coming out of their accounts, and it’s a small administrative challenge to start up and to end,” Lang said. “But people do have them. I have a couple myself for charities that I support.”

In the case of ACH, no actual check is sent. This saves time not only in terms of waiting for a check to clear but also in terms of a donor writing a check (or putting it off for a while), mail delivery time and the time it takes a nonprofit to process and deposit a check. ACH is controlled by the National Automated Clearing House Association (NACHA), a consortium of financial institutions whose charter is to provide a standard means of delivering banking transactions electronically between member institutions.

In an effort to combine efficiency with speed, Hopkins is preparing a proposal for the bank handling CCF funds that will convert scanned checks into ACH transactions. This, he said, will provide speed as well as enhanced security and efficiency. He estimated that checks will be able to clear in two days.

Both Zietlow, who has co-authored a book on nonprofit financial management, and Lang emphasized the need for nonprofits to establish good working relationships with banks and other parties and to take the best possible advantage of the latest in services and technological advancements.

Lang observed that banks can also provide breakdowns on donations, such as what comes in as dues or what comes in as charitable contributions, for instance, and that information can be entered and stored.

“That can save accounting time, and not an inconsiderable amount of time, either,” Lang said.

Keep the bank in mind, however, when seeking to establish such relationships, Zietlow cautioned. He quoted a reminder from Wayne Kissinger, group vice president of the Central Region of SunTrust Bank in Atlanta, that a bank cannot maintain a relationship indefinitely if that relationship is losing money.

Frank Kurre, National Not-for-Profit Managing Partner of Grant Thornton LLP in New York City, said that many larger organizations have negotiated their own deals with banks that enable them to get quick access to their donations.

Such bank reconciliation services available to large organizations may include a bank sending the organization a file listing checks, without checks even coming back. The organization then matches up the information from the bank with its own cash system.

Even though small and mid-sized operations may not be able to negotiate the same deals as large-volume organizations, there are still a number of financial institutions that have dedicated nonprofit departments or groups.

One problem nonprofits may face is that many banks do not like handling high volumes of small-value checks, said Renee Frappier, marketing manager of PacNet Services Ltd., a payment services company in Vancouver, B.C. In addition, there is still the matter of international donations to nonprofits.

Frappier cautioned that accepting checks internationally can run into their own problems, including resistance from donors who are not happy to hear that organizations accept currency only from the country in which they are located.

Opening bank accounts in foreign countries can be costly, as can cashing foreign checks in U.S. banks. As with large volume in small-amount checks, a check processing agency may be the answer.

“I would say that banking relationships (with nonprofits) today should take full advantage of the technology that’s available,” Lang said. “In the same way that many organizations have outsourced different kinds of work, banks today are prepared to take on many of the jobs that are relatively routine, being able to handle the accounting, for example.

“So, taking advantage of available banking services today makes as much sense as something like outsourcing payroll. And the banks frankly want it. Think about it. If you can make a tenth of a cent on a hundred transactions you make a dime, but if you make a tenth of a cent on a million transactions you make a lot more.

“It’s trying to work to one’s core competencies, which for nonprofits is not handling money.”

The idea of nonprofits establishing and maintaining relationships was a very strong one, whether it be with a bank, a check processing company or a non-financial institution, such as the arrangement CCF has with Media General. Hopkins said that nonprofits need to be alert and open-minded to possibilities other than traditional financial institutions.

“The point for nonprofits is to look outside the traditional channels of processing,” Hopkins added. “It is not limited to a lock box or a processor or a bank.

“Look for partnerships. Look for someone who wouldn’t normally provide that type of service. There are a lot of high-volume companies out there that process their own materials in house, and if you can find somebody like that you can hook up with, it actually can help a lot.”