The Accounts Office of an organization is responsible for making and receiving payments for the organisation’s purchases or sales. Procedures for making and receiving payment are done through the form of: (a) cash, cheques; Cash This is one of the easiest way to make and receive payments. It is useful when two organisations involved in a business are located close to each other. There are several advantages and disadvantages of using this practice to make or receive payments. Advantages: There is no charge involved when carrying out a cash transaction unlike a transaction where a financial institution is involved. When a customer makes a cash payment to the seller the money is received instantly Disadvantages: It is risky to carry around a huge sum of cash. One can be a victim of robbery or theft. This type of transaction makes it difficult for the government to tract the transactions made by the organization regarding making and receiving payments. This affects the government’s ability to tax that organization. Paying with cash does not offer any kind of tracking facility. The only proof of payment with cash is a physical or electronic receipt. Cheque This is a popular alternative to the use of cash. There are different types of cheques available for carrying out transactions. This would be discuss later on in this section. The advantage and disadvantages for using cheques for making transactions are as follows: Advantages: Cheque payments are safer and more convenient that cash payments Cheque payments can be stopped when required. Disadvantages: When a seller receives a cheque from a customer, there is no guarantee that the payment will be successful. A cheque may get bounce if a person’s checking account does not have the funds or if it is a fake account. An organization can give a seller a postdated cheque and close the bank account after. Therefore the seller would not be able to clear the cheque and receive the finances for that transaction. If a cheque bounces for any reason, the bank would charge a penalty fee from the party that produced the cheque at the bank. (c) money orders, postal orders; Money Order This refers to a payment order for a pre-specified amount of fund. This payment never expires. E.g. Western Union, Money Gram Postal Order This payment is similar to a money order, however funds used in this process are less than that of a money order. Therefore this type of payment is not suitable for business transactions. Also proof of one’s identity has to be provided to collect the money. Some advantages and disadvantages of this methods of payments are: Advantages: These two method of payments are relatively safer than cash and cheque payment methods. A prepayment is required from the purchaser therefore there is a guarantee that the suppliers will receive the amount. These two payment options are easily accessible to everyone as post offices can be found on all part of the region Disadvantages: Payment made using these methods are time consuming as one must visit the post office to send the money order or postal order A fee is charged to carry out this type of transaction. Online Banking can be used to carry out the following: (d) electronic transfers, credit transfers; Electronic Transfer This refers to the movement of funds from one account to another over an electronic medium. This can take place with one financial institution or multiple through computer based systems. Organisations cane making and receive payments using several electronic transfer mean such as a: a credit or debit card This is automatically transfer to the receivers account, a pin is required to deduct the money received on the bank account. Using online banking This is done using the internet where customers can deposit and transfer funds like traditional banking however one is not required to visit the bank. Like another payment option, Electronic transfer has its advantages and disadvantages Advantages: This payment method takes less time The chance of lost and theft with this method is lower than that of cash or cheques. If someone loss their debit or credit card, he or she can immediately contact the bank that issued the card and request that the authority blocks the card. It is very convenient for making large payments as a person is not required to carry the entire amount in cash. Disadvantages: Users are charged a fee for making and receiving payments via the electronic transfer method. To be able to successfully use this method one is required to have internet access. The card scanning machine requires internet to conduct the transaction via electronic transfer. Credit Transfer This refers to the act of transferring money from one bank account to another. It is widely used by business organisations. The purchaser has to fill in a physical form or an electronic form to state the account details of the supplier’s bank account Credit transfer has several advantages and disadvantages Advantages: This method can make organization comfortable to conduct transactions with each other as the purchaser do not have to worry much about the payment process as its bank transfering the amount to the suppliers bank account. Credit transfer are quite simple to operate. Disadvantages: Organisations are charged a fee by the bank for carrying out the credit transfer service. Credit transfer can be time-consuming in case of any national or bank holiday. This service will be delayed as a result. (e) standing orders; Standing Order This is an order given by a bank’s customer to the bank to make a definite (fixed) set of payments at specific time intervals to another individual or organization. The bank will charge a monthly or overall fee for providing this service. This method is suitable in cases where the amount that one needs to pay another is predictable. Direct Debit This is an alternative to a standard order in cases where the amount that needs to be paid by one to another is unpredictable or likely to vary. It is also an order given by a customer to a bank. However in this case, the customer authorizes the customer to provide instructions to the bank regarding the payment to be made into the supplier’s account from the customer’s account at definite intervals - A standard order and a direct debit also have some advantages and disadvantages: Advantages To pay using these methods allows a person or an organization to spread payments over a period It saves time. The Customers only have to notify their banks about, tenure and date; the banks take care of everything. Disadvantages: A customer has to pay a bank fee for making payments using a standard order or debit. A standard order or direct debit can only be used by organisations that have the adequate financial strength to pay the full amount. Small organisations may not be able to avail this facility due to lack of adequate funds. (f) bank drafts; Bank Draft This is a payment made by issuing bank on behalf of a payer to payee. The payer is the party that makes the payment, whereas the payee is the party that receives the payment. A bank draft is similar to a cheque however when requesting a bank draft, the payer must transfer the amount mentioned in the bank draft along with a fee from its accounts to the bank immediately. A Bank Draft also have some advantages and disadvantages: Advantages Using a bank draft is more secure than using a cheque because it guarantees that the payee will receive the amount. A bank draft is a prepaid instrument, therefore a payment to a payee cannot be denied on the basis of insufficient funds. Disadvantages: A bank draft is not as fast as an electronic transfer. It takes time to process the bank draft after a payee deposits it. It is not secure and reliable in cases when it sent to the payee via post as it can be lost in transit or get stolen. A bank draft is not cost effective in cases when payments are made frequently as the banks that issue bank drafts charge for their services. (g) letters of credit. Letter of Credit This is a letter used to make and receive payments in international trade. It is useful in businesses where a buyer and a seller are located in different countries that have different laws regarding trade. The bank produces a letter of credit which guarantees to pay the amount once the terms and conditions of the business are met and the necessary documents, such as evidence of shipping the items, are provided. A letter of credit also have its advantages and disadvantages: Advantages The buyer doesn’t have to make a payment for products until they are shipped, and they meet the requirements under the terms and conditions stated in the letter of credit. A supplier does not have to worry about a payment as the payment is a guaranteed by the bank of the buyer. Disadvantages: A buyer has to make a payment without the physical verification of the products. In general, the cost of operating letter of credit is more than other payment methods.
