Finance illustration Finance theory

Investigating methods of making and receiving payments

There are a number of ways that businesses and individuals can make payments to others. Typical methods of making payment include cheque payments and electronic funds transfers. In addition there are methods of making regular payments such as direct debit and standing orders. Cash continues to be important but is becoming less so. Increasingly customers make payment by debit and credit cards.

A cheque is a written order made out by a banks customer instructing their bank to make a payment on their behalf. This is a relatively safe way of making a payment but has the disadvantage of taking 3 or 4 bank working days to clear. This can be harmful to cash flow for businesses that are paid by cheque.

Electronic funds

Electronic funds transfer methods enable quicker payments to be made by a business to suppliers and to employees. When funds are transferred electronically by individuals (and businesses) who use the same bank then payment can be made on the same (or next day). Businesses make use of electronic transfer systems for paying large numbers of employees or paying large numbers of suppliers using automated computer systems. Electronic funds transfers can be tied into the accounting system of a business.

Businesses may ask customers who have to make regular payments to pay by standing order or direct debit. For example, these can be used to pay gas, water, electricity and insurance bills. When a customer makes out a standing order they instruct their bank to pay a regular sum on a regular date. The order stands until the customer alters the arrangement.

Direct debit

A more popular method is the direct debit. This is similar to the standing order except that it gives the recipient of the direct debit the power to alter the amount that needs to be paid. Businesses prefer to be paid by direct debit because from time to time they will want to alter the sums that they are paid e.g. when an insurance company raises its premiums.

In investigating methods of making and receiving payments students should first research different methods of payment to business, and then give examples of situations in which different methods will be appropriate. They should list the advantages and disadvantages of each method.

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