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Accounts Receivable Conversion Definition
An accounts receivable conversion (ARC) is a method through which paper checks are converted to electronic payments using the Automated Clearing House (ACH). Checks that a company receives in exchange for an account receivable is electronically scanned and then changed to an electronic payment.
ARC is mostly used by large and successful companies as an alternative to the traditional and physical way of processing checks. ARC as a process is time-effective but not cost-effective. The conversion process is quite expensive.
A Little More on What is Accounts Receivable Conversion (ARC)
Evolution and development in the financial industry gave rise to the creation of accounts receivable conversion. It is a process through which checks are turned to electronic payments. The financial industry is largely computerized, this is why ARC has enjoy popularity in the industry. Before it was created, the lockbox banking was the common method of payment, this is time consuming.
ARC converts checks to electronic payment through the Automated Clearing House or ACH and ACH is managed by NACHA (National Automated Clearing House Association). ACH complies with NACHA operating rules. Quite a number of companies process their transactions using ARC. 21.5 billion transactions which is worth more than $46.8 trillion were processed by ACH in 2017.
Accounts Receivable Conversion and Financial Innovation in Commercial Banking
Accounts receivable conversion (ARC) is one of the many financial invocations in commercial banking. Aside from ARC, other laudable innovations were birthed. A good example is mobile banking which grants businesses and individuals access to their accounts and ability to manage their accounts without the help of a physical bank manager.
All forms of financial transactions can be done using the mobile banking platform, this includes payment for services, utility bill payment, cash transfers and deposits or checks.
However, mobile banking only functions when a secure connection has been established between a bank and the customer using mobile banking. This helps to prevent invasion from a third party that can lead to the system being compromised or loss of money.
Reference for “Accounts Receivable Conversion (ARC)”
Academic research on “Accounts Receivable Conversion (ARC)”
Accounts receivable conversion: Should you do it?, Latham, L. (2004). Accounts receivable conversion: Should you do it?. Journal of Corporate Accounting & Finance, 16(1), 43-44. Does your company receive high volumes of consumer check payments through the mail? If so, your firm might benefit significantly from accounts receivable conversion. But how do you tell if it is really right for your company?
Accounts receivable management in nonprofit organizations, Michalski, G. (2012). Accounts receivable management in nonprofit organizations. Zeszyty Teoretyczne Rachunkowości, 68(124), 83-96. Accounts receivable management should contribute to the realization of basic financial purpose of a nonprofit organization, which is the most financially effective realization of its mission. The non-profit organization’s mission realization is more effective when it is realized in the most efficient way. It is also executed with a focus on risk and uncertainty. This article presents the consequences that can result from operating risk to determine the level of accounts receivable in the nonprofit organization. Any change in the level of accounts receivables in a nonprofit organization increases the net working capital level and influences costs of holding and managing accounts receivables. Data collected from the 2009 and 2010 financial statements of 337 Polish nonprofit organizations are used to illustrate the material.
Corporate returns and cash conversion cycles, Jose, M. L., Lancaster, C., & Stevens, J. L. (1996). Corporate returns and cash conversion cycles. Journal of Economics and finance, 20(1), 33. This study examines the relationship between profitability measures and management of ongoing liquidity needs for a large cross-section of firms over a twenty-year period. Long-run equilibrium relationships between the cash conversion cycle, a measure of ongoing liquidity management, and alternative measures of profitability are tested using both nonparametric and multiple regression analysis. Industry and size differences are controlled. While there are exceptions to the general finding for specific firms and for specific industries, the paper offers strong evidence that aggressive working-capital policies enhance profitability.
A cash conversion cycle approach to liquidity analysis, Richards, V. D., & Laughlin, E. J. (1980). A cash conversion cycle approach to liquidity analysis. Financial management, 32-38. Static ratios are inadequate and, at times, misleading in the evaluation of a firm’s liquidity position. Although use of receivable and inventory turnover measures of an operating cycle concept introduces the important aspect of financial flows, the analysis is incomplete, because not all relevant flows are considered. The addition of a payables turnover ratio, and the subsequent calculation of the cash conversion cycle, adds a new dimension that provides more complete insights into working capital management and liquidity analysis.