Rush (Manual) Checks and DPO

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Q: I am looking for a better way to calculate DPO as we have many "urgent" check requests that are processed and paid in the same day that are skewing my DPO. Currently we use the following formula: AP EOM BAL/PER DAY AMT. The per day amt is calculated by: total payment/# of days in the month.

A: You can cut out your urgent check payments from the monthly payment totals and from the ending balance if there are any at the end of the month in A/P, and then calculate your DPO. This will eliminate the skewing caused by the rush checks. Be sure to note that the DPO figure excludes rush checks. In addition, isolating the amount and number of urgent check requests can give valuable information to management to address why so many urgent check requests are happening, which is another issue, and prompts these thoughts about rush checks:

  • If you are making a number of urgent check payment requests that are bringing down your DPO then it's an opportunity to provide the information to management and gain their buy-in on how to reduce them. It impacts the cost effectiveness of your A/P operation to have to stop and run rush checks on a regular basis. The cost to run them is higher than your normal processing. In addition, it is probably a symptom of a deeper problem of not getting the invoice information to you in a timely manner, which should be addressed.

 

  • Some articles to consider:
    • Check Reduction and Handling: Provides information on what some companies have done to reduce paper checks and their handling, especially with small dollar payments.
    • Payment Errors: An article addressing how payment errors or duplicate payments arise, one of which is rush checks.

The question of on-demand urgent requests for payments is one of company policy. In theory it would be best to avoid rush checks entirely. However, that tends to be impossible in actual practice. Nevertheless it is a best practice to keep the number of on-demand urgent checks to a minimum. Too many rush checks mean weak internal control and can lead to errors and duplicate payments, and put you at risk for fraud. They are also, as we mentioned, disruptive. It is impossible to avoid them in all situations, but they should be true exceptions.

Controls should be in place around on-demand urgent checks, such as requiring a system search, keeping a log of all on-demand checks issued, and asking (and documenting) the reason for the on-demand check. When a requestor is required to document his or her reason for it, the on-demand check may prove unnecessary. Proper communication of relevant AP schedules, policies and procedures can also help to prevent rush checks.

Enlist the support of senior management for a policy change by discussing with them the risks and problems of rush checks.

Final note: In one Fortune 100 company, a rumor began circulating that AP shared services was going to begin charging $100 per rush check. Though there was no plan to actually do so, reportedly the rumor was effective in reducing the number of rush checks.

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