The majority of businesses now pay suppliers electronically because it is more convenient while also having better control over the signing process.
This is reflected in the analysis of methods to process an invoice for payment received by participants in the Credit Management Benchmark.
Cash is not ‘King’…and neither is Cheque
Not that I expected to see cash featuring where participants in the benchmark process are mainly serving business customers (B2B). However, I was a little surprised to see that cheque payments (or check payments for North American readers) had fallen so low.
A few years ago, I was engaged by a State-run business development agency to advise small and medium businesses on their use of technology. At the time, most invoices were paid by cheque and when I suggested paying electronically, I was often laughed at with comments such as ‘our suppliers would never accept payments electronically – they want cheques!’ Well it appear now as if the tide has well and truly turned.
Electronic Payments Dominate
Receiving payments electronically is now the dominant means through which payments are received from customers. However, there are significant regional variations, with ‘checks’ still accounting for a very significant percentage of payments in the North American market, while in the UK, payments by methods other than electronic transfer are the exception. In fact, in the UK as many as 80% of all payments are made by electronic transfer.
e-Day
In Ireland, September 19th 2014 was designated by the government as ‘e-Day’, the day from which the Irish State would no longer issue cheques but would instead pay its bills electronically.
The rate of cheque payments in Ireland is 27% which is far higher than the UK.
Given that e-Day has come and gone, I was surprised that a government body is planning to send me a payment by cheque even though they have my bank account details!
Direct Debit is Third Most Popular Payment Method
In many ways, direct debit is the ideal payment method. You are in control of when funds are debited from your customers’ accounts (as long as you abide by the rules governing the amount of notice to give to customers and customers don’t dispute debits after they have been collected).
With the advent of the Single European Payments Area or SEPA for countries using the Euro, it has become easier to collect payments from anywhere in the Euro zone.
What about other forms of payment?
Invoice discounting and invoice factoring only account for a small percentage of payments received. Factoring is normally far more visible than discounting because the name of the company to whom invoices have been ‘sold’ is included on each invoice and the factoring company is normally responsible for collecting payment.
Invoice discounting on the other hand is usually not visible to customers when they receive their invoices.
Essentially with these sources of funds, invoices are paid within days of being issued by a finance company and when customers pay their invoices, the funds are returned to the finance company.
It is a relatively secure form of lending for finance companies, and provides access to cash for businesses. This is particularly important for companies that are growing and need access to cash to fund their growth rather than having funds tied up in credit extended to customers.
Traditionally, it has been an expensive form of credit mainly because of the need for finance companies to assess the risk profile of their customers’ customers, the audits necessary to initially advance funds and then to review to operation of accounts, and the work necessary to validate the authenticity of invoices.
The good news is that technologies are now available that can reduce risk and workload for finance companies which should result in lower costs to business and as a result the figure of 6% of payments being received through either invoice discounting of invoice factoring may increase.
Reconciling Payments
If remittance advices are sent, it makes the process of allocating payments against invoices easier. Electronic payments can actually make the problem worse if the correct reference numbers are not used when making payments.
As can be seen from the benchmark results, there are still 41% of payments received for which remittance advices are not supplied. This can make the process of discovering which invoices are being paid difficult.
I have spoken to many credit managers about this and while some allocations are very obvious, i.e. a payment amount matches either a specific invoice or an account balance at a point in time, there are others that are very difficult to reconcile, and this may account for the 13% of time spent by credit teams allocating receipts, and almost certainly accounts for a significant portion of the 15% of credit team time spent handling account queries.
Pay Electronically – Send Remittance Advice
Electronic is the most efficient means of making payments so if you are sending a payment make sure to include a reference number on the payment and send a remittance advice too!
I would also suggest encouraging all customers to pay electronically, either by signing up to direct debit or by making payments electronically but I would also suggest that customers be requested to send details of what exactly they are paying in the form of a remittance advice.
Why not Participate in the Credit Management Benchmark?
All of the data above has been drawn from an analysis of responses to the Credit Management Benchmark.
You too can receive your own personalised report that provides you with interesting insights into your credit function by participating in the Credit Management Benchmark process.
Complete the online assessment, and you will receive your on tailored report within 3 business days. All information is strictly confidential.
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