Find out interesting insights with Shaun Walker, SOX Compliance Manager, Norfolk Southern

Moderated by Sherry, Financial Technology Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Sherry: Hello, and welcome to all our viewers on CFO Insights. I am Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have Shaun Walker here with me, who is a seasoned internal audit leader with a wealth of experience in driving risk management, compliance, and governance initiatives across diverse industries. Thank you so much for joining us today, Shaun. Today we’ll be talking about strategic management of late payment penalties for optimal cash conservation. To get us started, can you explain what late payment penalties are and why they are important for businesses?

Shaun Walker: Certainly. Late payment penalties are fees imposed by vendors when invoices are not paid within the agreed-upon payment terms. These penalties serve as a deterrent against delayed payments, ensuring that vendors maintain their cash flow and financial stability.

Sherry: And how do companies compute the cash conserved by avoiding late payment penalties?

Shaun Walker: To compute the cash conserved by avoiding late penalties, companies need to calculate the potential penalties they would incur if payments are delayed and compare this to their cost of capital. The key formula used is the annualized penalty rate, which helps determine whether it’s financially beneficial to pay on time or conserve cash by delaying the payments.

Sherry: Can you provide an example where the annualized penalty rate is higher than the cost of capital?

Shaun Walker: Sure. One scenario would be a 1.5% penalty after 30 days every month, with an 8% cost of capital. If the penalty percentage is 1.5% per month and the penalty period is 30 days, the annualized penalty rate comes out to 18%, while the cost of capital is 8%. In this case, it’s financially detrimental to incur the penalty, so paying on time is preferable to avoid higher penalty costs.

Sherry: And can you also provide an example where the annualized penalty rate is lower than the cost of capital?

Shaun Walker: Yes. For example, let’s say the penalty rate is 0.3% after 25 days, with a 10% cost of capital. If the penalty rate is 0.3% per month, the annualized penalty rate is 3.6%, while the cost of capital is 10%. Since 3.6% is less than 10%, incurring the penalty is advantageous. By delaying the payments, the company conserves cash that can be invested elsewhere at a higher return than the penalty cost.

Sherry: How does the cost of capital influence the decision to incur late payment penalties?

Shaun Walker: The cost of capital represents the company’s required return on its investments or the cost of borrowing funds. If the annualized penalty rate is greater than the cost of capital, incurring the penalty is financially detrimental. If the annualized penalty rate is lower than the cost of capital, incurring the penalty can be financially advantageous. Understanding this relationship helps CFOs make informed decisions about whether to pay early or delay payments to optimize cash flow.

Sherry: What strategies can companies use to minimize the impact of late payment penalties?

Shaun Walker: Companies can implement several strategies, including:

• A robust accounts payable process
• Automated reminders and alerts
• Effective cash flow management
• Negotiating better terms with vendors
• Prioritizing payments
• Maintaining open communication with vendors
• Utilizing technology

Leveraging tools like Hyperbots’ Payment AI Copilot helps analyze payment data, identify potential delays early, and recommend corrective actions.

Sherry: How does Hyperbots’ Payment AI Copilot assist in optimizing late payment penalties and cash conservation?

Shaun Walker: It offers multiple features, including:

• Automated tracking of payment schedules
• Data-driven insights for decision-making
• A recommendation engine to optimize payments
• Scenario analysis for different payment strategies
• Alerts and reminders to prevent missed deadlines
• Integration with financial systems for a unified view of payment data

These features enhance efficiency and accuracy in payment management.

Sherry: In what scenarios might a company choose to incur late payment penalties, and why?

Shaun Walker: Companies may choose to incur late payment penalties in several situations, such as:

• Cash flow constraints: When cash is needed for critical operations, delaying payments can help conserve liquidity.
• Higher return on investments: If a company can invest the cash at a higher return than the penalty cost, it may opt to pay late.
• Strategic cash management: Some businesses prioritize cash for other strategic initiatives.
• Negotiated terms: Companies may have agreements allowing them to delay payments with minimal impact.
• Noncritical vendor relationships: If penalties are minor and vendor relationships are not at risk, delaying payments might be a viable option.
• Economic uncertainty: Companies may prioritize liquidity over maintaining perfect payment records, accepting minor penalties in exchange for financial stability.

Sherry: What advice would you give to other CFOs regarding the management of late payment penalties and cash conservation?

Shaun Walker: My advice would be:

• Understand your financial metrics and assess penalty costs versus cash flow needs.
• Leverage technology to automate and optimize payment processes.
• Maintain strong vendor relationships and negotiate favorable terms.
• Implement robust accounts payable processes to minimize late payments.
• Regularly review payment policies and educate your team.
• Plan for cash flow variability to avoid financial strain.
• Analyze payment data to make informed decisions.
• Balance cash conservation with financial health to optimize both liquidity and vendor relationships.

Sherry: Thank you so much for joining us today, Shaun, and for such an insightful conversation.

Shaun Walker: Absolutely, thanks for having me.