The payment process appears deceptively simple at a glance. Below the surface, it covers creating prepayment workflows and making approvals, determining when and how to pay invoices, deciding which payment methods to use, and keeping payments secure. For specialty contractors, mishandling materials payments creates both inefficiencies and fraud risk that can lead to significant financial consequences.
Inefficiencies Within the Payment Process
An inefficient payment process is likely to cost your business much more than time or a missed discount. The potential financial losses are substantial, and understanding where they’re most common will allow you to make strategic changes.
Payments made by check take time.
The time required to manually draft and deliver checks can quickly add up, leading to payment delays. It can even result in complications for bookkeeping and cash flow if vendors delay cashing checks once they’ve received payment.
Most importantly, checks pose a significant financial risk because they have the potential to be lost or stolen. According to the Association for Financial Professionals’ latest report, checks continue to be the form of payment most impacted by fraudulent activity. For the majority of organizations, less than 10 percent of funds stolen due to fraud are recovered.
Contractors overlook incentives.
Vendors often have their own challenges with cash flow, so many incentivize their contractors to pay early. Unfortunately, managing invoices from different vendors—each with their own payment terms and requirements across the scope of a project—means few contractors are able to take advantage of these incentives.
Cash-back rewards programs available through business credit cards offer additional incentives for direct savings and flexible cash management not available with traditional check payments.
Payment data is fragmented.
Consolidation of payment data to a centralized system can be a challenge when payment methods are varied from one vendor to the next. This fragmentation of payment data across receipts, emails, and electronic files is needlessly complex to reconcile with manual data entry. It’s time-consuming, error-prone, and limits data accuracy and data visibility.
Manual payment approval processes are tedious.
Improper cash flow management and mistake costs throughout procurement can put a contractor’s business at serious risk. Payment approval workflows create financial oversight and accountability through executive review of purchases before signing off.
Effectively, this practice adds an internal hold to every invoice to prevent errors, inaccurate payments, fraud, and embezzlement. However, the traditional process of sifting through spreadsheets, emails, and documents for line-item review is tedious and inefficient.
Opportunities to Improve the Payment Process
To resolve inefficiencies in the payment process, it’s best to implement practical systems that prevent fraud, increase accuracy, and make better use of time and resources.
Protect payment data.
When your payment process relies on manual payments, such as checks, the risk of fraud and financial damage reaches critical levels. According to a letter by the U.S. Senate Committee on Banking, Housing, and Urban Affairs, banks saw the rate of check fraud increase by 84 percent in 2022.
This makes the migration of payments and related processes online an urgent priority to prevent financial damages as a result of payment fraud. In addition, centralized payment systems offer greater visibility into and accountability of payments to protect from any bad actors within your business.
Take advantage of incentives for better cash flow management.
In many cases, credit card rewards programs offer as much as 1.5 percent cash back for each purchase, benefiting your margins and improving overall project spend. If a vendor requires 30-day terms and your business credit card has the same, you gain an additional 30 days to complete your payment process.
This achieves a more flexible 60-day term without the complications of delayed payment processing. When paired with early payment discounts from vendors, you can take proactive steps to keep materials costs low.
Automate your payment process.
Many third-party solutions facilitate automated bill pay to vendors for secure transactions, preferred payment methods, and terms. To manage purchasing and payments effectively, it’s important to have a process that can systematically prioritize which invoices to pay first, where to capture financial incentives, and account for cash flow constraints without extensive manual overhead.
Not only are bill pay tools an impactful way to do so, but they also save money and improve vendor relationships through timely, secure payments.
Streamline internal payment approvals.
If you’re able to implement streamlined three-way invoice matching, the payment approval process is enhanced as a downstream effect. It simplifies review, reduces overhead, and removes human errors that come from manual data entry and siloed information.
A purpose-built procurement solution can also use rules-based programs that automate predictable tasks with efficiency and reliable accuracy. For example, threshold logic allows for any invoice over a threshold of $1,000to be flagged for executive approval and invoices below the threshold to utilize a more automated process based on errors and deviation. Deviation logic allows invoices within a limited range, such as 1 percent of their purchase order, to be automatically approved for payment processing.
Invest in Better Materials Payments
Through secure, accurate payments and effective cash flow management, you can save money and increase productivity for better job outcomes. To discover the full benefits of optimized payment processes, read 7-Steps to Better Procurement for Specialty Contractors, and improve your construction planning from end to end.