How to Manage a Pile of Held Checks

December 22, 2016 Ryan Perrone No comments exist

us-treasury-checks

 

Step 1:  DON’T

 

Step 2: See Step 1

 

Before I go into some more detail, let me clarify what I mean by managing a pile of held checks.  I consider held checks to mean anything that is printed and then not mailed prior to conducting the next check run.  Typically, this is weekly for most companies.  So, if you print checks during week 1, and then it becomes time to print checks for week 2, and there are still some checks sitting in the drawer, most likely due to a lack of funds, then you are holding checks.  If your organization prints out checks and drops them in the mail in between check runs, and does not have any leftover at the end of the week, I don’t consider that to be holding checks.

 

Why do companies do this?  First of all, not every firm has the luxury of always having ample liquidity to pay every bill on time.  For small companies, they may operate on a pure cash basis, where the slow payment of a couple invoices could cause them to delay payments in order to avoid going negative in the bank account.

 

Other companies may do this even if they have ample liquidity, as they would rather push around their vendors to have even more liquidity.  I have witnessed companies where they receive a stack of checks from a customer and the checks were all printed when due, but delivered 60 days later.

 

Here’s why you follow Steps 1 and 2:

  • Lack of Visibility – The best place to look at the balance owed to a vendor is the AP aging in the accounting system, which provides insight into what bills are unpaid and their corresponding due dates.  Once a check is cut, the invoice is removed from the aging.  Trying to piece together what is owed to a vendor now requires checking two sources, one of which is probably nothing more than a stack of paper.  Understanding the overall picture with vendors is more difficult when the information is incomplete.
  • Confusion – If a check is cut, but not mailed, there is the risk of confusion inside the business. One party may have visibility to a vendor balance and think there are no issues with payment.  In the event of a stopped shipment, an employee could find out about unpaid bills from a vendor, instead of hearing it direct from management.  That can make a difficult situation even harder to manage (rumors travel quickly).
  • You are fooling no one, but yourself – While it may feel better to print those checks out, hoping it can go in the mail that week, it does not do any good to do so if you end up with a pile of-un mailed checks.  Doing this week in and week out just adds to the problem.
  • Accidents Happen – A check that is produced always has the opportunity to leave the building.  What if you don’t sign it until they are ready to be mailed?  That may not matter, sometimes banks will accept checks (accidentally) that are not signed.  Just like the check that you hoped would not leave on its own, the bank can make mistakes too.  Once you catch the error of an unsigned check clearing the bank, the vendor has already applied payment to your account.  By reversing this process, you risk upsetting a vendor, and possibly drawing more attention to your situation than you would have by slow paying them.

What if you’re unique?  For whatever reason, you think your business is an exception and won’t have any of the issues mentioned above.  Congratulations, you are a unicorn!  Pat yourself on the back.

 

In my experience of working with small businesses and / or those in financial distress, I have only seen one company successfully manage held checks with ease and efficiency.  That being said, they had an accounting staff of 4 people who were all very competent, and had developed a well-thought out and systematic approach to handling the checks.  Of course, had any of them gone rogue and dropped some of those checks in the mail, all hell would have broken loose (it was a running joke, in a sick and twisted way).  Despite having a savvy group of people, the reason they needed to go through this trouble was because of inadequate risk management and an untrustworthy executive assistant (that will be a part of a future post).

Leave a Reply

Your email address will not be published.