Department of the Treasury

Improve Money Management By Optimizing Contractor Payments

Money management optimization can save millions for the taxpayer that can be put to better use elsewhere. The government spends billions each year to pay contractors for their goods and services. We have also automated the accounts payable system (EDI) making it paperless. It allows for contractors/vendors to submit electronic invoices and the government in turn pays by electronic funds transfer. This system has become so efficient that it has tilted slightly in favor of our contractors. Because of the inherent “hands free” nature of the accounts payable process very little human intervention is involved when routine payments are made for goods and services. Thus, contractors are being paid quickly and everyone thinks the system is working as planned.

 

The government (if you can believe this) has become too efficient. We frequently pay the contractors too fast. As in all business transactions, when a contract for goods or services is negotiated part of the deal is what are the payment terms. Typically, we pay vendors net 30 days from receipt of invoice. However, our accounts payable system due to little human intervention has enabled vendors to be paid early, in some instances at 20 days instead of 30.

 

If we stick to the terms negotiated and ensure that payment goes out as required on the final day of the negotiated payment term we will improve the working capital available to the Treasury. Just think, billions of dollars being held by the Treasury for a week to ten days longer would earn millions of dollars in extra interest that can be repurposed for other government needs.

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Idea No. 5640