Postdated Checks in Accounts Receivable

Outcome

Debts are paid by deposit of a postdated check on or after a certain date.

Use the result to monitor the company's cash flow.

These files are updated:

• Accounts receivable file (FSLEDG) and details (FSLEDX)
• Accounts receivable balance file (FSLBAL)
• Creating account entries: Master file (FPDCP1), checks on payer level (FPDCP2), invoices (FPDCP3)
• Check master file (FCHKMA)
• The general ledger file (FGLEDG).

Checks of type 1 are saved with information category number 226, displaying all invoices connected to each check number. Value type 42 (customer risk not cancelled) is updated in 'Accounts Receivable. Display Balances' (ARS225).

Starting conditions

• The company must have a policy for managing postdated checks.
• A payment type for postdated checks must be created in 'Payment Type. Open' (CRS078) and connected to a payment method for check entry. The payment type must indicate whether the postdated check is of type 1 (payment class 4) or type 2 (payment class 1 or 2).

If the check is of type 2, these values must also be defined:

• The payment type must indicate when the customer risk should be cancelled in the accounts receivable balance file: At bank remittance, at check entry, or when account entries are created in 'Postdated Check. Create Account Entries' (ARS320).
• The payment method must indicate how the accounting date is to be set when account entries are created in (ARS320). The date is automatically calculated as the valid deposit date of the check minus the number of days entered on 'AR Payment Method. Open' (CRS076/E). This starting condition is applicable to checks of type 2 only.

Basic workflow

This basic workflow is very similar to the workflow for regular checks or drafts:

• Seller sends invoice to customer
• Payer sends postdated check
• At due date, the seller asks the bank to cash the check
  • If the invoice is correct, the transaction gets completed.
  • If the invoice is incorrect, the rejected check is returned.

You as the buyer

Basically, you can issue a postdated check whenever you wish to guarantee the seller that money for purchased goods or services will be available on and after a certain date in the future.

The advantages of using postdated checks are:

• You can send a check with the same valid deposit date as the due date of the received invoice to avoid paying earlier than you have to
• You can write several checks at the same time for recurring payments, for example for rent or alimony, knowing that the checks will be cashed at the specified dates during the year
• You can plan your cash flow better and prevent that your check account is overdrawn due to unexpected check deposits.

You as the seller

Release the goods or perform the service in reliance of the check writer's promise to pay at some later date rather than in reliance of the check's negotiability.

The main advantages are:

• Customers may be more willing to buy goods or services, although their funds may not currently be sufficient for a cash payment
• Accepting postdated checks is an easy way of extending credit, easier, for example, than creating and managing a payment plan.

The payment terms with the customer determine whether postdated checks should be accepted.

Use of postdated checks in the USA

Postdated checks are also used as a quite common payment method in the USA. There are, however, some statutes that prohibit or limit the use of such a check.

In most states, the rule is that a postdated check may be paid before its valid deposit date so long the check is otherwise properly payable. To prevent this from happening, the customer is required to give the bank a notice of the postdating in advance, describing the check with reasonable certainty. The bank charges a processing fee for identifying and postponing the cashing of the check.

If the bank in spite of that would charge against the account of the customer, it is liable for any damages sustained by the check writer, including any damages incurred as a result of the dishonor of any subsequent checks.

One reason for this is that banks are processing large numbers of checks each day. For technical and human reasons, banks generally do not check the date on a check before they pay it.

• Risk factors

  As seen above, the two main risk factors in managing postdated checks are:

  • The risk to the check writer that the bank will fail to notice the date and pay the postdated check prematurely
  • The risk to the bank that it will be liable to the check writer for charging the premature item against its customer account, if the check was not considered properly payable.

  The Uniform Commercial Code (UCC) defines a check as "a draft drawn on a bank and payable on demand." Since a postdated check is not payable on demand, it has generally been held by most states that the giving of a postdated check is not within the scope of the bad check laws.

  Debt collectors used by the company may not deposit a postdated check prematurely to cover outstanding customer debts.

• "Payday loans" based on postdated checks

  Payday lending is a fast-growing industry in the USA. A payday loan is a short-term cash advance on a postdated check. It is a very high-interest-rate loan, typically two weeks in duration. Borrowers who are granted a loan write a check postdated to the end of the loan period and literally or figuratively walk out with the cash. At the end of the term, they have the option of continuing the loan for an additional period by paying the interest. The loan can be renewed as often as the borrower likes.

Processing postdated checks in M3

M3 supports the processing of two types of postdated checks: definite and preliminary.

For both types of checks, the date of the check is most likely identical to the due date of the original invoice. If not, the customer should be contacted and asked to send a new check or the due date of the invoice be revised. This facilitates the routines for customer debt management and credit monitoring.

• Type 1 (Definite)

  The check is treated very similarly to an accepted draft. In fact, you specify it as a payment class 4 document, that is, a bill of exchange/draft. The check is recorded and allocated to invoice. The invoice is closed and accounting transactions are created. Then it is remitted to the bank for collection on the due date. When the bank has confirmed the collection, the check is reconciled as paid.

• Type 2 (Preliminary)

  This type is primarily used in Asia; it is not considered legal in all countries. You record the check preliminarily but no transactions are created. It can be allocated to invoice directly or afterwards. Some time before the valid deposit date, you select the checks for which account entries should be created and update the ledgers. You do this in a separate program, 'Postdated Check. Create Account Entries' (ARS320). After that you remit the check to the bank for collection or collect it manually.

  The main difference between the two types is that by using preliminary checks you can record the check without updating your ledgers with new transactions – the invoice remains open. For this type of postdated checks, you can control when the customer risk should be cancelled (refer to Before Starting).

  The payment forecast is automatically updated for the payer in 'AR Payment Forecast/Age Distribution. Display' (ARS260) when the preliminary check is entered, although no account entries are created. Since the invoice is still open, however, it would still be included as open in 'AR Statement of Account. Open' (ARS140) or 'AR Statement of Account. Open' (ARS640) until the account entries are created.

  Any cash flow plans created in 'Cash Flow Plan. Open' (CFS200) are not updated until the checks are processed in (ARS320).

• Programs used for check entry

  In both cases, checks are entered either in 'Payment Document. Enter' (ARS105) or 'Payment Received. Record' (ARS110). The difference is that when using (ARS105) you can choose not to allocate the check to specific invoice records. There a separate list of entered payment documents is printed as well when finishing the entry.

  Note: If you enter the check using the entry portal, 'Journal Entry & Payment. Open' (GLS110/B), you must allocate the check to invoice directly.
• Monitoring checkbook

  Since definite postdated checks are processed like drafts, you can review them in 'Customer Draft. Display' (ARS280). The same statuses are used as for drafts.

  Preliminary postdated checks are displayed in the checkbook, 'Customer Check. Display' (ARS430), depending on the sorting order and status selected.

  Sorting order 3 enables you to see all preliminary checks for which account entries are not created, with these statuses:

  10 = Not allocated to invoice

  20 = Preliminary allocated to invoice

  40 = Included in an accounts allocation proposal in (ARS320).