Despite the advances in hardware, software, and networking, the accounting departments of many small to midsized businesses still operate as if they were in the 19th—not the 21st—century. While we have elegantly automated the accounting process, the usual result is that a piece of paper—a check—is put in the mail.

Despite the availability of electronic funds transfer alternatives, many companies still prefer to mail printed checks to their creditors. In fact, many companies have resisted electronic funds transfer systems for the payment of their trade debts, claiming that their internal systems won’t accommodate electronic funds transfers, and that they have neither the human nor economic resources to pay creditors in this “nonstandard” way.

Loss of Control or Excuses?

Other companies worry about tracking systems, hackers, costs, and the loss of control over the process. They cling to the familiar and make their creditors wait by their mailboxes for a piece of paper that can be lost, delayed, or destroyed in countless ways while in transit. When the creditor calls, looking for the lost check, the creditor usually experiences a
“devaluation principle” firsthand—the services rendered or products shipped have become valueless after the customer receives them, and now the satiated customer isn’t in any hurry to pay or reissue payment. Then there are the companies that defer creditor payments because of real or imagined cash flow problems, whose problems trickle down to their creditors. I call these companies floaters.

Many analysts believe that electronic bill presentment and payment (EBPP) systems will finally gain traction in 2001. These systems allow customers and creditors to create and review invoices and make payments through secure Internet-based portals without any paper changing hands. These systems can also provide significant cost savings compared to the processing of manual invoices and checks. The recent merger of industry leaders CheckFree and TransPoint signals that the technology is falling into place for both consumer and B2B applications. Unfortunately, I suspect the reasons EBPP systems aren’t widely used in the B2B world are cultural problems, not technological ones. Until these cultural problems are resolved, many companies will avoid EBPP for their B2B commerce (but may warm up to it for B2C commerce).

Blaming the Mailman

The primary cultural problem with EBPP systems in B2B environments is that they eliminate all of the rote excuses for tardy payment and the ability to “ride the float” that goes with those excuses. Slow payers can’t blame the mailman, the mailroom, holidays, weather, or countless other entities for the “lost” check or the “lost” invoice.

Why care? After all, if everyone plays along with the float game, then everyone shares in its blessings and burdens. If your company’s customers are slow payers, your company becomes a slow payer (a floater) for its creditors. And, as a practical matter, there is no penalty for floating, because late fees and interest charges will normally be written off by the creditor if it wants repeat business from the floater. Some profloaters subscribe to a Darwinian theory: If a creditor can’t give a little float, it is poorly managed and should die, since it doesn’t have enough cash flow to survive. Some go so far as to get angry when their floating practices are openly questioned.

In good economic times, the shared float/blame-the-mailman game almost works, although smaller or cash-strapped companies suffer. But in bad economic times, few can afford to share the float, and the economy at large suffers. If the economic forecasts for 2001 hold true (a “soft landing” in pundit-speak), then wide-scale use of EPBB systems in B2B commerce (and the abolition of the float game) could help reduce the effects of any economic downturns. Unlike in prior recessions, a greater percentage of the economy is comprised of smaller companies that are less able to tolerate long-term float. Your company could be one of those unable to tolerate long-term float by the bulk of its client base during the soft landing.

Sinking the Floaters

So what can you do? Evaluate the true and complete cost of playing the float game for your company and its commercial suppliers. Chronic floaters will likely have larger personnel and infrastructure requirements for their accounting systems to handle the irate creditor calls. The document management, check printing, and mailing processes have associated costs and related IT infrastructure, which IT can measure. Your department may have personnel dedicated to accounting processes, including programming projects related to check printing and invoice management. Track the amount of time you must spend assisting your department’s vendors, contractors, and suppliers with their overdue payments, and assign an hourly rate to that time. Add in an opportunity cost factor, including loss of business goodwill and lost IT opportunities (especially if IT spends time designing, managing, and implementing payables-related systems instead of devoting resources to other projects with more strategic value).

If you complete your cost/benefit analysis, you may find some dramatic cost savings that greatly outweigh any float profits. Present your findings to a decision-maker, and mention the EBPP systems and electronic funds transfer systems as alternatives. You may end up with a high-profile project and prevent the float game from turning the soft landing into a hard crash.

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