Posted by Kevin Meehan
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.
The payments process requires strong internal procedures to ensure a smooth process. Best practices include:
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):
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.
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:
Consult your bank for complete rules on ACH payments.
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.
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.
Measure the percentage of:
Measure the ratio of:
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 email@example.com, Jason Zeman at firstname.lastname@example.org 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.
Receive insights from our specialists in a variety of areas and timely information on upcoming events directly to your inbox as they go live in our online Knowledge Center.