While senior financial executives are charged with squeezing even the smallest inefficiencies out of routine business processes, few have explored perhaps the final frontier in supply chain management -- the payment.
There is no single answer to the question, "How should I pay?" An important place to start is learning about the fundamental economics and benefits of each type of payment. Your mission is to achieve an optimum mix of electronic and paper payments.
The first rule of your payment strategy should be, "Think cards first."
The hard cost facts
Each payment option -- paper checks, ACH, credit card or wire -- has benefits as well as restrictions. Paper checks remain the reigning champion of payments when it comes to business-to-business transactions.
Annual business-to-business spending totals more than $7.8 trillion, as reported by Tower Group Commercial Payment Cards in the U.S. Product Overview December 2001, with 86 percent of those transactions paid by check, according to a survey by the Electronic Payments Network.
Yet, the days of paper checks as the dominant payment type may be numbered. Check 21, a law that became effective late in 2004, promotes the future electronic exchange of check images as part of the check-clearing process in order to reduce the distance that paper checks must be physically transported.
Many businesses previously benefited from the float, or lapse in time, between issuing the check and having the funds debited from their accounts. The reduction in this float benefit is expected to reduce the reliance of businesses on checks.
Those still clinging to this payment type may find increasing costs charged by their financial institutions to process the paper.
When Automated Clearing House (ACH) payments are combined with information or data within an electronic data interchange, there is significant value, especially when used to process invoice and payment information with your strategic trade partners. Of course, ACH is relatively inexpensive when used on its own, but you diminish your float benefit as ACH transactions typically settle within two days.
Wire is more costly but is the best payment tool to guarantee and expedite payments.
Purchasing cards are the fastest-growing payment tool in the marketplace. Card acceptance has become more widespread, and cards are used to purchase almost everything a business needs -- from office supplies and hardware to customer entertainment.
Cards allow you to make just one payment to the bank each month to cover all of your card transactions made with individual vendors. Cards can reduce soft costs of about $5 to $15 per invoice in accounts payable personnel and monthly check writing activity.
Most important, purchasing cards are one of the few cash management tools that can generate income for you through a revenue share program. Your revenue potential is based on the total volume spent on your purchasing cards.
Other factors that might impact your payment choice should be discussed with your financial adviser. Based on the costs and benefits of each payment type, a complete overhaul of your payables may be in order.
Remember to think card first, ACH second. Many businesses that are finally on board with purchasing cards are wondering why they hadn't done it sooner.
Ben Willingham is senior vice president and sales manager for corporate banking in Ohio at PNC Bank, National Association, member of The PNC Financial Services Group Inc. Reach him at (513) 651-7558.
This was prepared for general information purposes only and is not intended as specific advice or recommendations. Any reliance upon this information is solely and exclusively at your own risk.