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Mary Schaeffer
Mary Schaeffer
Payment Stretching

Dealing with the fallout.

February 5, 2009
by Mary Schaeffer

As the economic climate turns gloomier, more than a few organizations find themselves scrambling for ways to pay their bills. Techniques that some use to stretch their payments is paying invoices a few days — or more — past the due date. The practice of payment stretching, advocated by some as a way of enhancing cash-flow, has serious pitfalls and should be avoided under most circumstances. However, it would be naïve to assume that given tight cash-flow, no one would fall back on payment stretching. The article to alerts readers to the pitfalls and suggest tips on how to deal with the situation.

Problems With Payment Stretching

The payment stretching headache is double-edged. Despite what many think duplicate payments increase any time payments are made after the invoice due date. This negates the positive financial impact of payment stretching. And sometimes, this more than outweighs the positive cash-flow effect of the stretching.

On the flip side, many organizations think that by ignoring the fact that they are stretching no one will notice. However, in this scenario, vendor relations plummet.

The Vendor-Relations Issue

As we head into 2009, your vendors are also likely to be experiencing cash-flow concerns. So, any move on your part to stretch terms is likely eliciting a more unfavorable reaction.

So what can you do to minimize the damage? Here are a few steps to consider:

  1. Manage the process. Set up a policy and make sure everyone within the organization understands what is being done.
  2. Get everyone on the same page. This means that both the purchasing department as well as the accounts payable department should be on the same page and relay the same information to your vendors. You company needs to present a united front to the public.
  3. Communicate not only internally, but also externally. Let vendors know what to expect. This may be the hardest step of all. Many firms are reluctant to let vendors know that they are experiencing financial difficulty. But, your suppliers may draw a much uglier conclusion if you leave them to come to their own conclusions.
  4. Don’t make any payment promises you cannot keep.
  5. Do not cut staff in accounts payable. You will need more people to answer the increase in where’s-my-money calls as well as run duplicate payment detection and prevention routines.

The Duplicate Payment Issue

The simple fact is that most vendors who are not paid within 30 days will issue a second invoice, which may or may not be marked duplicate or second invoice. The fact remains that a small percentage of these will be paid. It is therefore imperative that your firm steps up its surveillance and identifies these invoices before they are paid. In a worse-case scenario, your company can identify them after the fact and still recover the funds.

To determine if you have a duplicate-payment problem, how bad the issue is and what tactics you can use to fight the problem, visit Duplicate Payment Resource Center. This is an area you should not skimp on because there’s too much money on the line.

Other Factors to Consider

There are some other considerations. Specifically:

  1. Decide what you are going to do about discount vendors. Are you going to forgo the discounts or continue to pay them within the discount terms?
  2. What about your critical vendors? These suppliers that provide a product critical to your operation — goods that cannot be obtained easily from another source.  
  3. Do you want to have your purchasing staff to pursue special extended payment terms as part of their negotiations?
  4. If you are not currently using p-cards, consider their use where appropriate, as a method of extending payment terms.
  5. If you have never used a duplicate-payment audit firm, you may want to consider hiring one. Not only can they find erroneous payments made over the last few years, they can supply intelligence as to where the weaknesses are in your system. If you hire one that works on a contingency basis, your bill will be minimal, especially if your organization doesn’t make duplicate payments. And, if you are wrong, you will still come out ahead of the game.

Conclusion

Difficult times require extra care when it comes to cash. Don’t get so caught up in your cash-flow processes that you overlook the unintended outcome of some of your decisions.

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Mary S. Schaeffer is the author of more than a dozen business books including Controller and CFO’s Guide to Accounts Payable. She is currently working on a book about fraud. (2007 John Wiley & Sons). She serves as the editorial director of Accounts Payable Now & Tomorrow, a newsletter for professionals interested in payment issues, writes a free weekly ezine e-AP News, speaks at accounts payable seminars and conferences and directs the organization’s consulting practice.