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Mary Schaeffer
 

Is Your Firm Prone to Late Vendor Payments?

Here are a few repercussions you should worry about.

February 7, 2011
by Mary Schaeffer

Do you have an accounts payable department that often delays payments for no reason? Are you at the receiving end of whereís-my-money calls? Whether your company misses payments due to cash-flow issues or sheer negligence, itís time to step up to the plate as your lateness can cause your firm wasted dollars. Read on to see why.

The Consequences of Paying Late

Most of the initial fallout from late payments falls square into the lap of your accounts payable department. Specifically,

  1. There is an increase in the number and frequency of the “where’s my money?” calls.
  2. The number of second vendor invoices sent increases as vendors attempt to collect the money owed them. Many aren’t marked duplicate or copy. It takes time to sort through them and figure out which have been paid or are scheduled to be paid and which have not.
  3. Inevitably, a few of those duplicate invoices get paid. Here’s another dirty little secret. Most vendors won’t return those duplicate payments. What’s more, vendors have been known to suppress credits when statements are requested. It takes a lot of hard work to find those duplicates, assuming they are found at all.
  4. Vendor relations become frayed as vendors sometimes have their own cash-flow issues, which your actions are exacerbating.

And, of course, late payments mean early payment discounts are lost.

What to Do When You Need/Want to Pay Late

To maintain good vendor relations, it is best in your firmís interest if you inform your vendors of all new payment policies at the onset. A clear directive on what to say to vendors who call looking for payments should be given to accounts payable. The whole company needs to get on the same page. This means management, purchasing and accounts payable. Come up with a statement that processors can use with vendors. Educate them and make sure they understand they have to honor the corporate policy. The last thing any group needs is a processor informing vendors of what he or she thinks of the payment policy.

Consider quantifying the cost of new policies to see if there is any leeway. Find out from vendors if there is any added costs or interest charged for late payments. The main cost will come from lost early payment discounts. Many organizations that take a stretching-payments approach still pay their discount vendors in time to earn the discounts.

The real cost comes when duplicate payments are made. Here are some other methods you can use to help reduce the risk of that problem:

  1. Make sure your processors exercise special care entering invoice numbers. You will receive a number of second invoices and it is imperative they are not paid. The invoice number is typically a key determinant and one that often does not get adequate attention.
  2. Add some simple duplicate-payment testing/matching techniques to your routines to catch any duplicates before they go out the door.
  3. If the workload becomes unmanageable, request additional staff to respond to the additional calls or ask for overtime for the staff. Of course, realize that your requests are coming at the point in time when the organization is least able to cope with the cost of additional staff.
  4. Consider online vendor self-service options to reduce the number of “where’s my money?” calls.
  5. Scrutinize rush check requests closely. Are they really rushes or someone trying to get around the extended payment terms? And most importantly, make sure you have appropriate backup for these requests and that purchase order (PO) and receivers are extinguished after the payment is made.
  6. Hire a payment firm to find any duplicates or erroneous payments that may have slipped through. You can’t afford not to.

Conclusion

Times are tough and some organizations are struggling — extended payment terms are just one consequence of today’s reality. By employing the techniques discussed here, you can limit the fallout.

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Mary S. Schaeffer is the author of over a dozen business books including Controller & CFO’s Guide to Accounts Payable (John Wiley & Sons) and Fraud in Accounts Payable: How to Prevent It (John Wiley & Sons). She is the publisher of the CFO & Controllers Accounts Payable Management Journal, a quarterly electronic journal for senior executives concerned about internal controls and cost control in their payment function, writes a monthly newsletter, a free weekly ezine e-AP News, speaks at accounts payable webinars, seminars and conferences and directs the organization’s consulting practice.