When “process” tops reason

At first, I thought it was one of those sales gimmicks designed to look like a check. Then I thought it was one of those checks that really is a check, but transforms itself into a purchase commitment once you cash it. However, after I saw the state’s treasury insignia, I knew my check was the real deal.

This weekend I was the recipient of a tax refund check in the amount of one dollar from a state in which I delivered services for five days last year. (And so I dutifully filed a state income tax return there). Somehow I was over withheld by one dollar and I’m pleased that the State of California came clean and issued my refund.

How many such checks does a state like California (described as the world’s sixth largest economy), generate each year? What does it cost to process them? What does it cost to reconcile them? How many go uncashed? I presume the reasons that payees would not cash such a check would be that: 1) he/she never received it; 2) they lost it after receiving it, or 3) they just threw it away. I doubt that fraud is an issue. Who would steal one?

My employer finds inefficiencies like this one because our software quantifies all low dollar disbursements (and also low dollar invoices). The Institute of Management Administration (IOMA) has published estimates of the internal cost for the average organization to generate a check. The last estimate I saw was $8 to $10 per check.

We don’t quibble with clients who feel their internal cost is lower than IOMA’s estimate. We’d rather ask the client to identify what number they want to use, because everyone knows it costs something. It’s in our interest to agree with their estimated cost per transaction, because it doesn’t matter. Whatever cost they want to use can be applied to so many low dollar transactions, that the cumulative estimate of the waste gets their attention.

We have all seen this sort of thing before with tax authorities, including the IRS. You have probably read articles where some system-generated letter from the IRS demanded payment of back taxes for a small dollar amount. The letter implied that a failure to make payment within a period of time could result in some serious, and thus cost-inefficient, IRS reprisal.

In the interest of efficiency, I would gladly forfeit my claim to the single dollar California owed me.  I don’t know what the states are bound to do, but is it conceivable that it would be more expensive to change their processes than to routinely generate and manage checks in the amount of a dollar or less? Would it require some vast investment to modify their accounting procedures and make system changes? Would it take decades to reap their payback?

Send me a quick e-mail if you have thoughts on the subject.