In this first installment of our series on treasury and risk management best practices, find out why it’s critical to incorporate payment process best practices into your business and what you can do to achieve that goal.

Implementing payment process best practices for your treasury department may not be the highest on your strategic objectives for 2021. When your invoices are due, you pay them, right? However, if the payment process is handled incorrectly, it can hinder your company’s cash flow, deteriorate vendor relationships and in extreme cases provide opportunities for fraud. The following payment methods, governance and controls will help you be more confidant in your payment process.

Optimal Payment Governance and Controls

The payments process requires strong internal procedures to ensure a smooth process. Best practices include:

• Consolidating invoices
• Tracking invoice due dates
• Setting payment reminders
• Ensuring the invoice due date and amount are used when forecasting to assess short-term liquidity requirements

Depending on your business structure, you may have one or many individuals responsible for paying your invoices. To simplify the task, identify these stakeholders; consolidate the responsibility, when possible; and hold the stakeholders accountable for paying the bills on time and accurately.

Some suppliers may offer an early payment discount to incentivize quick payment. For example, 2/10, net 30 states the buyer can reduce the invoice amount by 2% if the invoice is paid within 10 days. If you don’t opt for early payment, the total invoice is due on or before day 30. Before electing to accept the discount, conduct a cost/benefit analysis that compares the amount saved from the supplier discount against the interest payment should you choose to borrow for 20 days (days 10-30). However, only organizations with an ample amount of cash should partake in this analysis. If a supplier discount causes liquidity concerns for your organization, then the early payment option doesn’t make sense.

To ensure treasury controls are established and maintained, create a treasury policy statement. This statement should include a(n):

• Clearly defined scope and controls for the treasury function with board approval.
• Established review cadence within the audit process to account for growth and attrition within the treasury function.
• Outline of the segregation of duties.
• Outline of user system access.
• List of designated individuals authorized to make payments.
• List of designated individuals authorized to negotiate on behalf of the company.
• Escalation process for policy breaches.
• Section with standard payment terms.

Ideally, your treasury staff should report to your treasury department rather than the controller to avoid potential collusion, coercion or just simple mistakes attributed to groupthink. In addition, at least two individuals should approve payments, with the final approval being a senior officer, while using an electronic banking system with automated audit trail creation. Systems access include established payment limits for individuals, and ensuring only necessary, properly trained staff can set up and release payments.

Common Payment Methods and Considerations

Depending on the terms of each respective payment, multiple options exist for electronic payments. Key considerations for two commonly used payment types are as follows:

Automatic Clearing House (ACH) Transfers

ACH Transfers:

• Take from one to three days to process
• Cost about $3 at most of the top 20 U.S. banks
• Follow National Automated Clearing House Association (NACHA) rules, which allow payments to be:
  • Reversed in the event of:
• Wrong dollar amount
• Incorrect recipient account number
• Duplicate transactions
  • Stopped if:
• The financial institution is notified within three business days of the transfer date

Consult your bank for complete rules on ACH payments.

Wire Transfers

Wire transfers:

• Generally are used for same day domestic payments
• Cost $22 on average for a domestic transaction
• Are final and cannot be changed or edited

If speed is not an issue, it’s generally best to choose to send payments via ACH due to its low cost and security advantages.

Key Initiatives and Performance Measurement via KPIs

While defining broad initiatives for your treasury function is a great start, assigning and tracking key performance indicators (KPIs) will ensure you are tracking to your ultimate goals. The following are key initiatives paired with their respective KPIs to provide insights while tracking payment initiatives.

Individuals Setting Up Payments

Measure the percentage of:

• First-time successful payments by payment method
• Payments containing mistakes by payment method
• Payments issued on time

Payment Methods

Measure the ratio of:

• System generated payments versus manual payments
• Electronic versus paper payments
• Wire and ACH cost versus benchmark
• Wire versus ACH payments

Choosing the correct KPIs is vital to the success of the initiative. KPIs allow for measurable results to hold stakeholders accountable and communicate the initiative’s success, or define where it needs help.

Whatever your goals are for your treasury function 2021 and beyond, they must be built on a strong foundation. Implementing payment best practices will allow your organization to have a sound treasury function free from simple mistakes hindering cash flow and vendor relationships. Additionally, you can realize considerable cost savings over time by implementing defined processes and simply choosing to send electronic payments via ACH.

Contact John Cavalier at jcavalier@cohenconsulting.com, Jason Zeman at jzeman@cohencpa.com or a member of your service team to discuss this topic further.

Cohen & Company is not rendering legal, accounting or other professional advice. Information contained in this post is considered accurate as of the date of publishing. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts, circumstances and current law.