Accounting Best Practices, Fifth Edition

3–41. Revise Payment Terms for Electronic Payments

When a company pays with checks, it cuts a check on the negotiated due date, which reaches the customer after a few days of mail float; they cash it, and another two or three days pass before the check clears. This results in an average total float of perhaps five days.

If the company switches to electronic payments, then the entire float vanishes, so the cost to the issuing company has increased by the five days of interest income that the company did not earn on the funds during the float period. In addition, the company must pay a fee to process the electronic transaction. Offsetting this lost income and processing fee is the cost savings from not having to process paper checks, which includes the cost of the checks and the bank’s check processing fee. Be sure to include in these costs only the incremental savings from not creating a check (e.g., if the check signer no longer has to sign checks, is the company actually saving money by then terminating the check signer (!), or does this person merely work on other tasks?). Thus, it is probable that the company’s actual incremental cost reduction is the cost of the check and the bank’s check processing fee, and nothing else.

After netting the lost interest income, electronic payment fee, and reduced processing cost, the company may still be losing money through the issuance of electronic payments. If so, consider negotiating slightly longer payment terms with suppliers to offset ...