Assumptions
Business Rules & Assumptions
Reducing the number of cheques written for Accounts Payable and received in
Accounts Receivable will save time, money and reduce the working capital tied
up in the business. Take a look at how we came up with the figures.
Service fees and interest rates are as of March 2015. The calculated results are for illustration purposes only and may not represent actual results for a particular business.
Save Me Time
The following assumptions were used for the time savings calculations:
| Activity |
|
Time Standard |
| Cheque issuance |
|
5 min each |
| Mailing inquires |
|
2 min each |
| Cheque handling and deposit preparation |
|
5 min each |
| Bank visits |
|
30 min each |
| Collections |
|
2 min each |
Accounts Payable:
- Cheques replaced by EFT: time savings include vendor inquiries
- Cheques replaced by credit card payment: time savings include cheque issuance
Accounts Receivable:
- Cheques replaced by EFT: time savings include cheque handling and deposit preparation and collections activity
- Cheques replaced by credit card payments: time savings include cheque handling
- One bank visit can be removed when: # cheques replaced x average value of each cheque > 10,000
Save Me Money
In addition to standard services fees, the following costs were used to calculate per cheque and deposit expenses and savings:
| Item |
|
Cost |
| Cheque stock |
|
$1.20 |
| Envelope |
|
$0.10 |
| Postage (Standard Letter) |
|
$1.00 |
| Allowance for overdraft handling charges |
|
$5.00 |
| Deposit slip |
|
$1.00 |
| Allowance for NSF cheques |
|
$48.00 |
| EFT transaction costs |
|
$1.00 |
| Other credit fee |
|
$25.00 |
- ScotiaConnect® Cash Management Plan for business monthly service charge of $35 not included
- Cash back or other credit card rewards and card fees not included
- Cost of goods sold = 50% of annual revenue
- Average vendor payment = 50% of average monthly revenue / # cheques written per month
Accounts Payable:
- Cheques replaced by EFT: Savings = per cheque issuance costs less the cost to process a monthly EFT file containing the equivalent number of transactions
- Cheques replaced by card payments: Savings = per cheque issuance costs
Accounts Receivable:
- Cheques replaced by EFT: Savings = per item and deposit costs less the cost to process equivalent number of EFT transactions
- Costs for merchant services = # of vendor payment replaced x merchant interchange rate of 2.00% (including an allowance for terminal rental and other fees) less the per item cost for cheques and deposits
Interests:
- Interest saved = working capital improvement x business financing interest rate (Prime +1.5%)
- Interest earned = working capital improvement x business savings interest rate (Prime – 2.00%)
Improve my capital
The following assumptions are used to calculate the improvement (reduction) in working capital required by the business:
- Working capital = receivables outstanding - payables outstanding
- Average number of days payables outstanding = 30 days
- Average number of days receivables are outstanding = 40 days
Accounts Payable:
- Improvement by paying by EFT = 0 days
- Improvement by paying by credit card = 30 days
- Improvement in working capital = # cheques replaced x average vendor payment x # days improved
Accounts Receivable:
- Improvement by collecting by EFT = 10 days
- Improvement by collecting by credit card = 28 days
- For credit card receivables, the value received is reduced by the 2.00% merchant discount
- Working capital improvement = initial total working capital tied up in the current receivables(# cheques x average value) less the average value of cheques received by EFT and credit card x # days fewer per month that these receivables are outstanding.