If your company is currently paying with checks, then you cut the check on the negotiated due date, it reaches the customer after a few days of mail float, they cash it, and another two or three days pass before the check clears. Let’s say this results in an average total float of five days.
If you switch to electronic payments, then the entire float vanishes, so your cost has increased by the five days of interest income that you did not earn on the funds during the float period. In addition, the company must pay a fee to process the electronic transaction. Offsetting this lost income and processing fee is your cost savings from not having to process paper checks, which includes the cost of the checks and the bank’s check processing fee. Be sure to only include in these costs the incremental savings from not creating a check (e.g., if the check signer no longer has to sign checks, are you actually saving money by then terminating the check signer (!), or does this person merely work on other tasks?). Thus, it is probable that the company’s actual incremental cost reduction is the cost of the check and the bank’s check processing fee, and nothing else.
After netting the lost interest income, electronic payment fee, and reduced processing cost, the company may still be losing money through the issuance of electronic payments. If so, consider negotiating slightly longer payment terms with suppliers to offset the increased cost. Of course, if the accounting department’s long-term strategy is to convert entirely to electronic payments, irrespective of cost, then it may not be useful to attempt a payment term re-negotiation, since some suppliers may opt to still receive check payments.