At its simplest, cash flow management means balancing money going out with money coming in while maximizing cash available. Cash flow forecasts are educated guesses that must account for a number of unknowns. For most businesses, reliance on paper checks is the number one obstacle to decreasing unknowns, increasing forecast accuracy, and improving cash flow management. Paper check programs are slow and costly and don’t provide the level of visibility and control needed to make highly accurate forecasts.
Created by Ryan Mason
Managing the float
The time-honored way of managing the accounts payable side of cash flow in a paper-based environment is by attempting to manage check float. You know the drill: You mail the check on Tuesday, and it’s not cashed until two weeks from today so you have use of the funds in the interim. It’s a dangerous game, because check float is like a blunt instrument for managing cash. You never know exactly when the money’s going to come out of your bank account, and once you mail the check you have no visibility until it hits. It’s not a very accurate way to make forecasts, and it’s not even a good way to maximize ca sh. With interest rates so low, there’s virtually no money to be made on check float. And even in the check world, processing has gotten more efficient, so you can’t count on long float times anymore.
Accounts receivable can’t always predict and control the money-coming-in part of the equation, but electronic payments—ACH and credit card—give accounts payable departments far more predictability and control over the money going out than paper checks. Epayments also cost less, making more cash available to work with.
A hidden drain on cash
Paper checks are a drain on cash. According to APP2P, the Accounts Payable and Procure-to-Pay Network, the estimated cost of processing a check is between $5 to $12. All the supply costs include checks, envelopes, stamps, and the labor involved in creating the file requires cutting checks, sorting them and stuffing them in envelopes to mail. Those are just the costs that are easy to identify.
Many companies have never actually calculated what their whole check program costs, because it’s just considered an unavoidable cost of doing business. Hidden costs include losing out on early pay discounts because of slow paper processing, and even late fees if you can’t get payments out on time. This is not uncommon in a predominantly check-based operation. Then there are issues with check follow up, and these cost money too. It takes time to chase down the vendor, figure out what happened to the check and to get them paid. If you can’t reach that vendor, you need to set up a whole new account to put that money aside and follow all the escheatment laws in that state. Companies paying vendors in multiple states need to know the escheatment laws everywhere they do business. It’s a lot to manage.
The ‘oops’ moment
Uncleared checks are really a wildcard that make cash management unnecessarily difficult. When you go and look at your bank balance—it’s not a real number. Everyone's probably had at least one “oops” moment where they miscalculated their bank balance because they forgot to factor a payment in flight into their forecast, or they overdrafted their account because a check cleared sooner than expected, or a long outstanding check suddenly got cashed. Overdraft fees certainly don’t help with cash flow.
It’s easy enough to do the math and see that there’s no financial value in check float, and in fact there may be an overall negative financial impact from continued reliance on paper checks. So why do check programs and check float schemes persist? First, many companies don’t realize there are now better alternatives to paper checks.
Technology has evolved and today’s ePayments solutions are far better than those offered even five years ago. If a company hasn’t looked at solutions recently, they may not be aware of how fintech companies are changing the B2B payments market.
Perhaps a bigger issue is fear. First, there’s the fear that automation will mean less control over cash. Then there’s the fear that a more efficient system will eliminate AP jobs. Neither is true.
If check float is a blunt instrument for managing cash, ePayments are a scalpel offering so much more precision and control. AP can schedule payment at the last possible moment to capture discounts or avoid late fees. They have total visibility into when payment is received. Buyers can negotiate better terms with the confidence that AP will be able to turn around payments fast enough to meet them.
Not only can ePayments dramatically reduce some of the labor and hard costs associated with paper processing, companies can actually make money on 20 to 25 percent of their payments through credit card rebates. Many companies simply don’t realize how many vendors accept payment by card these days.
Electronic payments solutions offer precision, control, and visibility that actually make it much easier to manage cash and forecast cash flow more accurately. AP can promote themselves out of tactical paper handling into more strategic value added activities. Of course, it’s always easier to manage cash when there’s more of it and the combination of lower processing costs and credit card rebates can even turn AP into a profit center.
** This article originally appeared on Receivable Savvy.
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