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Every financial transaction involves a payee and a payer. For business owners, these terms can be misleading because your role may change depending on the type of transaction. Understanding when you are acting as the payee and when you are the payer is the first step in developing your financial operation processes. Clarity on what to expect from each role can empower your financial team to dial in your expectations for every transaction. This article defines each role and explains how optimizing this relationship can streamline your business’s cash flow.

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Payee vs Payer: An Overview

A financial transaction is an exchange of goods or services for payment. A transaction involves two or more parties that can be individuals, private entities (like a business), or public entities (like a government). In every financial transaction, there is a payee and a payer. Before going into detail about each of these roles, here is the simple definition of both.

• The Payee is the party receiving the payment in the transaction.
• The Payer is the party making the payment after having received the good or service.

Who is the Payee in a Financial Transaction?

What’s important to know about the payee? The payee is the entity that offers goods or services and receives payment. When doing business with your customers, your organization is operating as the payee. Your role as the payee is to provide something of value and await payment in return.

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How Does a Payee Receive Payments?

The distinguishing role of the payee is that they receive payment. But this is a pretty broad definition as it includes any type of settlement, monetary or not. For the intents and purposes of your business, we will focus on monetary transactions. However, you may receive payment through various methods, depending on the nature of your agreement with your customer.

Payment methods include the basic cash payment (though only 16% of consumers choose to pay with cash). More likely methods include physical checks, credit cards, direct debit, wire transfers, or other digital payment systems.

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Examples of Payees in Transactions

For example, when you go to a convenience store and buy a soda, you pay at the register and then go about your day – soda in hand. In this case, the convenience store is the payee. They received payment for a good.

Employees are also payees. As an employee, you exchange time, effort, and services for a paycheck.

Most likely, you are trying to figure out your business’s role as a payee. When customers purchase goods or services from your organization, they then must make a payment to you. In this case, your business is the payee. Your accounts receivable (AR) team handles all payee interactions.

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Understanding the Payer in Financial Transactions

There can’t be a payee without a payer. The payer is the entity that makes the payment in a transaction. After receiving value in the form of a good or service, the payer is responsible for honoring the financial obligation by transferring funds to the payee.

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Responsibilities of a Payer

The payer must take accountability for their role in a financial transaction. They are expected to have sufficient funds to complete the transaction and ensure the correct amount is paid. Additionally, they must make the payments by the deadline agreed upon in the initial contract.

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Examples of Payers in Transactions

Let’s look back at our previous examples. At the convenience store, the customer buying the soda is the payer because they make the payment when they check out at the register.

Similarly, the employer is the payer because they must pay their employee’s wages by the set terms (salary amount, pay date, etc…).

In your business, you also likely act as a payer. When you buy supplies or pay for a software subscription, you are acting as the payer. Your accounts payable (AP) team will cover these transactions. On the other hand, when you are awaiting payment from a customer, that customer is the payor.

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Difference Between Payer and Payor

A small note on semantics: you can use either the spelling payer or payor to refer to this role. “Payer” is more widely used, while the term “payor” will be used in more formal contexts. For example, the American Medical Association (AMA) prefers the term “payor” in their documentation.

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The Relationship Between Payee and Payer

The relationship between the payee and payer is central to every financial interaction. It operates on trust and mutual agreement. This contract is baked into the status quo of our daily shopping excursions, but financial leaders need to create clear processes around the payee/payer relationship to set expectations for their customers.

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How the Payee and Payer Interact

To understand what should be involved in this process, you need to be clear on how the payee and payer interact. A typical business transaction usually follows these steps.

First, the payer starts the interaction by requesting the product or service that the payee offers. After delivering that value, the payee will send an invoice to the payer.

The payer will process the payment on an agreed-upon timeline. The transaction wraps up with the payee providing some form of receipt.

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Impact on Cash Flow

Maintaining a smooth relationship between the payee and payer can bring consistency to cash flow planning for both parties. Payees rely on timely payments from their customers to meet their own expenses. When payers keep a close eye on their obligations, they maintain stability in their own financial planning.

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Potential Issues in the Payee/Payer Relationship

While the payee/payer relationship is designed to be straightforward, miscommunications or inefficiencies can lead to disputes, strained relationships, and cash flow disruptions for both parties. These issues often stem from unclear expectations, process breakdowns, or external factors affecting either the payer or payee.

To avoid these hiccups, your accounts receivable team should set clear payment terms, prioritize accurate and on-time invoicing, and follow up with overdue invoices. Automation tools can help smooth your AR processes.

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How to Automate Payments Between Payers and Payees

Trying to manage your AR manually is tedious at best and error-prone at worst. Integrating automation tools into your workflow streamlines the relationship between payers and payees, providing benefits such as:

• Improved accuracy: Reducing human errors in processing transactions.
• Faster payments: Ensuring payees receive funds promptly.
• Efficiency: Saving time and resources by reducing manual intervention.
• Cash flow predictability: For both payees and payers, automation helps manage recurring transactions.

Though these are pretty clear advantages, automating your transactions can present some challenges. As with any software investment, there’s a cost. Not only will there be a set-up fee, but you’ll need to dedicate time to train your team on using the new tools.

Our best advice is to avoid starting from scratch. Look for software that works with the systems you already use to minimize the onboarding phase as your team gets used to the new setup.

This is exactly what we are doing here at Fazeshift. We’ve built a tool that fits into your AR processes that already exist. We simply plug the holes and fill the gaps so your team can expect invoices to be paid on time, every time. It’s not a revolutionary concept, but it is a revolutionary tool. Fazeshift adapts to all your client’s payment processes and centralizes your AR into a single platform. Schedule a demo to see what it can do for your team.

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