The Bad: Writing 6 Checks To Pay One Bill

Could it be that six checks are better than one?

In an earlier blog (August 12, 2012) I wrote about my 10/80/10 rule: 10% of all nonprofits are “good” organizations who understand how to run efficient effective financial departments; 80% of organizations, the “bad”, mean well but don’t know how to improve their financial processes; and 10%, the “ugly”, know better but choose to do things anyway with their money that they should not.

Here is an example of a bad organization.  They meant well but did not know better.

This organization paid expense bills with as many as six checks.  To make things even more interesting for their vendors, they did not mail the remittance advices along with the checks so vendors did not know what the checks were paying for.  Many vendors, thoroughly confused, had to call the organization to find out what was going on.  It was quite a mess!

When we at YPTC first met with this organization they explained that their in-house accountant seemed to be spending a lot of time paying bills and dealing with vendors and they were wondering why.  It did not take us long to find out!

The logical question is why were they doing this?

I should mention that this is a good-sized organization with an annual budget of $2M.  It is staffed by some smart sophisticated people doing work for many years internationally.  This is not some small recent startup.  The executive director and their COO both knew something was not right with their accounts payable procedures, but they did not know what.

It turns out that this organization gets government funding for five main programs.  Since the programs are government funded, this organization wanted to be scrupulously careful that the restricted funds were only used for their intended purpose.  No argument here…their motive was good.

To accomplish their objective of managing their restricted funds they set up five bank accounts, one for each program.  They had a sixth bank account to pay for other non-funded operating and administrative expenses.  When a bill came in, say the rent bill or the phone bill, they carefully determined how much each program should pay and issued separate checks.  So the landlord or the phone company might receive as many as six checks in the mail to pay for one bill.

Their in-house accountant, for reasons that were never clear to us, then detached the remittance advices from the checks and did not mail them.  (A typical check is printed one check per page with two perforated sections below it containing information about what the check is paying.  Standard practice is to detach one perforated section to keep with the paid bill and leave the other perforated section attached to the check so that the recipient knows what is being paid.)  Many vendors were confused by this.  Since the check amounts did not agree to the invoice amounts, and since there was no remittance advice, vendors had to call the organization to find out what was going on.

Extra bank accounts also meant extra time was needed to reconcile them all each month.  (Their government contracts did not require that funds be physically segregated.)

With all the time needed to write checks, talk to complaining vendors, and to reconcile accounts, it was no wonder that the in-house accountant seemed to be spending all of his time paying the bills!

Fortunately, this story has a happy ending.  First, this organization hired us (sorry for the shameless plug).  We showed them how, by using proper accounting procedures, they could achieve their objective of maintaining tight control over the spending of their restrictive funds, pay bills with just one check, eliminate the need for perplexed vendors to call, and greatly simplify the bank reconciliation process.

We were able to significantly speed up the accounts payable process.  Less time meant less money was spent processing bills.  The improved processes we implemented also resulted in better control over their restricted funds.

This is one of many success stories we have had where something can be done faster, cheaper and better.

Comments welcome.

Eric Fraint, President and Founder
Your Part-Time Controller, LLC