ACCOUNTS PAYABLE- WEEK 3.pdf

ACCOUNTS PAYABLE WEEK 3- IMPROVING THE RELATIONSHIP WITH PURCHASING, MASTER VENDOR FILES, DISCOUNTS, DEDUCTIONS AND THE PROBLEMS THEY CAUSE IMPROVING THE RELATIONSHIP WITH PURCHASING Although it is important and...

ACCOUNTS PAYABLE WEEK 3- IMPROVING THE RELATIONSHIP WITH PURCHASING, MASTER VENDOR FILES, DISCOUNTS, DEDUCTIONS AND THE PROBLEMS THEY CAUSE IMPROVING THE RELATIONSHIP WITH PURCHASING Although it is important and beneficial that accounts payable get along with all other departments, the relationship with purchasing is often the most crucial—and unfortunately, is often the most tenuous. Traditionally, but definitely not at all companies, accounts payable and purchasing were at each other’s throat—each feeling that the other didn’t understand their requirements and was making their own jobs difficult. Because the two groups have to work closely together, the smoother this relationship can be made, the better it will be for the individuals who work in both departments, as well as the company as a whole. I am happy to report that there are numerous companies where accounts payable and purchasing work well together. Also, over the last few years anecdotal evidence suggests that there has been a marked improvement in the rapport between the two groups. Interaction between Purchasing and Accounts Payable Purchasing provides accounts payable with the most crucial piece of information it needs to pay an invoice—the purchase order. The purchase order (PO) spells out the agreement that the company has made with a particular vendor. In theory, if the PO is filled out correctly and completely (the first problem), accounts payable should not have to contact purchasing as long as the invoice matches the PO and the receiving department checks off the receiver and indicates that everything was received. However, this is not how it works at many companies. The invoice is often sent back to purchasing, and accounts payable only pays it after a purchasing executive has approved it. Why is this approval necessary? That’s a good question. Of course, in many organizations, the purchase order is not filled out completely, the invoice doesn’t match the purchase order, and/or the quantities or quality of goods on the receiver does not match the purchase order. Resolving these discrepancies is no fun and is not high on anyone’s list of priorities—until the supplier is refusing to ship additional needed goods and everyone is up in arms. Of course, I’m presenting the worst-case scenario, but even one half as bad is bound to lead to frayed nerves, mistrust, and bad feelings. It’s no wonder many accounts payable/purchasing relationships are frayed. Why Getting Along Is So Important For starters, resolving discrepancies requires cooperation. Although it is true that the primary responsibility for resolving discrepancies falls at the purchasing department’s feet, it is accounts payable who has to deal with the fallout of poor or late research. It is in both parties’ best interest to get these errors resolved quickly and efficiently while keeping the vendor as happy as possible. If the relationship is good, accounts payable is much more likely to be able to get purchasing to complete its purchase orders completely so accounts payable has the information it needs to process payments quickly and efficiently without bothering someone in purchasing to help resolve a discrepancy. Thus, while it is in everyone’s best interest, accounts payable ends up the biggest winner as they are eliminating many of their problems, freeing them to work on more meaningful work. Points of Contention There are five main problems that arise between accounts payable and purchasing—at least from the accounts payable viewpoint: 1. Missing information on purchase orders—One of the biggest complaints many accounts payable professionals have with purchasing is that some purchasing personnel do not completely fill out the purchase order. Then when an invoice shows up, the accounts payable professional does not have the information needed to determine if the invoice is correct. Even sending the invoice to purchasing for approval does not always solve the problem. Many executives will routinely approve an invoice without checking the details. Thus, the company may end up spending more than it had originally anticipated. But, if this is the case, there is little that the accounts payable associate can do other than pay the approved invoice—certainly not an ideal situation for any company. Points of Contention 2. Misinformation about discounts—Purchasing departments are sometimes quite adept at negotiating special deals that give their companies price breaks or other favorable terms. For example, sometimes toward the end of a period, be it a quarter or a fiscal year, a supplier will offer extended terms in order to get the sale on its books. The customer is then not required to pay for the merchandise until the end of those terms—which, in certain instances, can be as long as six months. In either case, the impact on the company’s bottom line should be positive. However, often just the opposite occurs, as purchasing never informs accounts payable of the special deal. Then when the invoice shows up, it is scheduled for payment according to the standard terms and the money goes out long before it should. Points of Contention Similarly, if the special negotiated prices are not communicated to accounts payable, it will pay the invoice as it shows up, especially if it has been approved. Often, the communication at the vendor is equally as poor, so the invoice that is presented does not show the special prices. Thus, with no one giving the special pricing information to the accounts payable department, the old prices are paid—probably for a larger quantity than would have been ordered under the existing price structure. Accounts payable associates need to find ways to get information about special pricing or term deals. The source of this information is the purchasing department. Duplicate payment firms love these problems as it means additional income for them when they recover funds due to missing pricing information. Unfortunately, they cannot recover lost investment income. Points of Contention 3. Delays—Delays in processing invoices in purchasing often mean extra work for the accounts payable department. Many accounts payable departments waste valuable time chasing down invoices that are either out for approval or out waiting for someone in purchasing to resolve a discrepancy between the invoice and the purchase order. Points of Contention 4. Lost discounts—The delays discussed above can also lead to the loss of an early payment discount. If purchasing does not turn around invoices quickly or resolve discrepancies in an expeditious manner, the company will not qualify for the early payment discount. Even though some vendors look the other way when a customer takes the early payment discount a few days late, not all are so generous. The amount of lost discounts can add up at firms that make substantial purchases. Points of Contention 5. Rush checks—Rush checks are a nightmare for accounts payable and can lead to other problems such as duplicate and/or fraudulent payments. Thus, most accounts payable departments work assiduously to eliminate them. Delays in the purchasing department often lead to a demand for a Rush check. This is especially true in the case of a valued supplier threatening to put the company on credit hold. Unfortunately, many outside the accounts payable department don’t understand not only how much extra work a Rush check causes accounts payable, but also the additional risks that cutting Rush checks entail. What Can Be Done to Improve the Interaction Getting along with purchasing is just one piece of the pie. The truth is that accounts payable needs to strengthen relationships with all departments, purchasing being the most crucial.There are several ways this can be done. Education Many of the problems with other departments come from the fact that there is no understanding of what goes on in accounts payable and what its constraints are. Educating the rest of the company—not necessarily an easy task—is the best way to address this issue. Start by sharing accounts payable’s time schedule. For example, if checks are run every Tuesday and Thursday afternoon, spread the word. If approved invoices and check requests must be received by noon on those days, make sure everyone is aware of this. Then when someone arrives with an approved invoice on Thursday at two in the afternoon, there will not be an argument. A memo with the schedule can be sent to all affected parties and the point can be reemphasized every time a Rush check is requested. Communication Simply talking to the professionals in purchasing can help. Once they understand what your concerns are and you understand what their issues are, you will be in a much better position to resolve some of the differences. Along the same lines, if problems persist with one or more individuals, it might be time to sit down and have a one-on-one chat with the person. Perhaps there is a misunderstanding that can easily be cleared up, or perhaps accounts payable can adjust some of its requirements to help solve the problem. The important thing to do is to start talking in a non accusatory manner. Having lunch with your peers in purchasing is not a bad idea. When you become friendly with those on the other side of the fence, it becomes easier to resolve errors and discrepancies and to get them to understand your problems. Role Reversal Walk a mile in their shoes. The best way to get purchasing and accounts payable to get along better is to each try out the other’s job for a short period. This might mean spending a day with a purchasing professional and then having a purchasing associate spend a day with you. In each case, the professional should go through their normal daily routine and allow the other to observe all the problems they encounter. The beauty of this approach is that both professionals come to understand the problems and issues the other encounters. Once they have this understanding, they might be able to suggest alternatives to make the relationship between the two work smoother. Remember, purchasing occasionally has some complaints about the way accounts payable handles what it considers to be sensitive issues—and occasionally, they have a legitimate complaint. An Accounts Payable Gift for Purchasing In many organizations, purchasing information is all over the place. This is unfortunate, because the more information purchasing has, the better job it can do negotiating pricing breaks for the company. Accounts payable usually has the information purchasing needs. It knows how much the company spends each year and it knows where every dollar goes. By working with purchasing, it is typically very easy to design reports that provide purchasing with needed and extremely useful aggregate data that can be used to strengthen negotiating positions. These data also allow purchasing to consolidate its supplier base from thousands to perhaps several hundred. Instead of having 56 vendors supply a given commodity, the company might concentrate its activity with the 5 to 8 that will provide the best price and service. Companies have been able to wring impressive concessions from suppliers when they promise to buy significant amounts of product. An Accounts Payable Gift for Purchasing Many purchasing organizations have been surprised when they began working with accounts payable to find out how many different suppliers the company was actually using in different locations. By consolidating the purchasing of key items, they have been able to save their companies millions of dollars—money that flows right to the bottom line. This money could not have been saved without the data input from accounts payable. Those accounts payable associates looking for a way to bridge a gap with purchasing might recommend to their superiors that they find a way to work with purchasing on this all-important issue. Summary Getting along well with all departments is important, as it allows accounts payable to ease in its own requirements. However, working well with purchasing is crucial, especially in a manufacturing environment, for the accounts payable associate who wants to survive and thrive in the position. Not only will the partnership make for a smoother, error-free environment, the accounts payable associate will be well situated should his or her company make the move of placing accounts payable under the purchasing umbrella. Master Vendor Files: An Often-Overlooked Function What Is the Master Vendor File? The master vendor file contains all the needed information about a particular vendor. Each file should have identical information. Generally, a master vendor file is set up when a company embarks on a relationship with a particular vendor.What defines a relationship varies from company to company. Some will establish an entry in the file after three transactions, while others require five or more. The exact number is typically set by company policy. Other times a company will be set up in the master vendor file if a serious purchasing contract has been signed. Master Vendor Files: An Often-Overlooked Function The file might contain information such as the following: The exact company name The mailing address where payments are to be sent Contact information in case there are problems—this might include both sales personnel and members of the credit department Payment terms Officers of the corporation Additional information, as determined by the company The company will probably also want to set a policy as to what investigation should be done on a company before it is entered into the master. Controls Most companies do not give unlimited access to the master vendor file to just anyone. The potential for fraud and errors is just too high. The few people who can update or edit the file are given strict instructions on how to update the file. For example, they might be told never to use abbreviations, never to use the word the in front of a company name, and so on. The company itself determines these guidelines. Another safeguard is to run a report periodically, but no less frequently than once a month, of all changes made to the master vendor file. Someone in senior management should review this report to make sure that all the entries made to the master vendor file were legitimate. Set-up Procedures Obviously, more than a few people can make recommendations for new entries to the master vendor file. In fact, in most organizations, many people will need to have vendors added to the master. The most efficient way to do this is to develop a form that must be completed by whoever is requesting the entry. The form should be signed by the requestor and then approved by someone authorized to approve such entries. This is very important in preventing fraud. In some companies, a vendor cannot be paid unless it is set up in the master vendor file. One-Time Vendors Companies face the conflicting issues of trying to keep the number of vendors in the master vendor file to a minimum while simultaneously requiring as many ongoing vendors be included in the file. Thus, the issue arises as to what to do about one-time vendors. Many companies do not enter them in the master vendor file. As already indicated, some have a requirement of three or more payments. Some accounts payable managers keep a file for miscellaneous vendors. All important information related to these infrequent vendors is kept in this file. There is no right or wrong answer as to when to include a vendor in the master vendor file as long as a policy is set and adhered to uniformly for all vendors. Summary Master vendor file policies and procedures are often overlooked in overworked accounts payable departments. By understanding the problems that lax policies can cause, the accounts payable associate is in the best position to implement changes that will limit a company’s potential losses due to fraud, duplicate payments, and extra work. Discounts, Deductions, and the Problems They Cause Discounts for early payment are a touchy issue in accounts payable. Many suppliers offer their customers a discount for early payment. The best-known early payment terms are 2/10 net 30. What this indicates to the customer is that the full payment is due in 30 days. However, if the customer will pay in 10 days, it can take a 2 percent discount. Thus, a company with an invoice for $100 could pay only $98 if the invoice was paid within 10 days or the full $100 if it was paid at 30 days. Although 2 percent might seem like a small amount of money, it can add up fast and is a very high rate of return for a company on its money. You will note that we did not indicate when the clock starts running for the 10 or 30 days. The supplier would like it to be 10 days from the invoice date, while most customers start the clock running the day they receive the invoice. Thus, the two parties rarely agree. Discounts, Deductions, and the Problems They Cause It should be noted that if electronic invoicing takes hold, there will no longer be any controversy over when to start the clock. Some suppliers start the clock running on the earlier of the invoice date or the date the goods are received by the customer. Terms of Sale 2/10 net 30 is not the only discount term used. Certain industries have their own terms. For example, terms in the food industry are much shorter. They might be, in an extreme case, 2/7 net 10, although more common is 1/10 net 11. In both these examples, the suppliers think that if the customer can’t pay within the discount period, it must be experiencing some financial difficulties. After all, why would a company not pay within the discount period if it had to pay a greater amount only a few days later? Vendors that make many shipments to the same customer, usually for small dollar amounts, sometimes move to what is called prox terms. The terms are then aggregated and payments are made once a month for everything ordered in the prior month. Payment might be due on the 15th of the following month in which goods were ordered. Then, instead of having, let’s say, 2/10 net 30 on a variety of invoices, with payments going out many times during the month, only one check is mailed. On average, everyone comes out equal. Unauthorized Deductions When paying an invoice, accounts payable professionals often reduce the invoice amount, usually at the direction of someone in purchasing or some other executive. Occasionally they do it themselves in order to pay for a partial shipment. When vendors do not approve these deductions in advance, they refer to them as unauthorized deductions. Unauthorized deductions often cause a lot of problems— for both the buyer and the seller. Here’s what happens. Let’s say an invoice for $20,000 shows up approved for payment for $19,750. The purchasing manager deducted $250 for an advertising allowance. This may be a legitimate deduction. The accounts payable associate does as instructed and pays the invoice for $19,750. When the payment is received, the vendor does not know why the deduction was taken or that it was legitimate. So, the accounts receivable associate credits the customer’s account but leaves an outstanding balance of $250. Unauthorized Deductions Then, either someone from the vendor’s collection department begins calling accounts payable trying to collect the $250 or the accounts receivable associate calls trying to uncover why the $250 was deducted from the invoice. Or, even worse, the customer gets put on credit hold because the invoice remains unpaid for an extended period of time. Whatever the outcome, the calls don’t start until days after the invoice has been paid and the accounts payable associate must check the files, because by then, the reason for the deduction is long forgotten. What a colossal waste of time for everyone involved. This problem has gotten so out of hand, especially in certain industries, that specialty firms have sprung up that do nothing but help vendors recover unauthorized deductions and unearned discounts. Unauthorized Deductions Needless to say, accounts payable doesn’t have the ability to resolve these, issues but accounts payable is where the calls come regarding short payments. Someone in accounts payable must then contact someone in purchasing to resolve the issue. As you might imagine, resolving deduction issues after the fact is not at the top of purchasing’s funthings- to-do list. In fact, resolving these issues leads to some of the friction between accounts payable and purchasing. Additionally, the constant interruptions that these phone calls bring to the work of the accounts payable department is not a real productivity enhancer. Most suppliers are not real thrilled about having to chase the customer for information or money, either. Thus, these phone calls can sometimes be contentious. In fact, resolving discrepancies after the fact is one of the least-liked parts of the function for most accounts payable associates. Unauthorized Deductions There are, however, some ways to deal with this issue. The best answer is to give the vendor as much information as possible.While logically this sounds like a wonderful idea, it is not always as easy as it would appear. Most checks are printed and then sealed and mailed without going back to accounts payable for any attachments. This means that all the information provided to the vendor must be included on the check stub. Normally, companies try and include the vendor’s invoice number and perhaps invoice date and maybe its purpose. After all, check stubs are not often that large and cannot hold reams of information. Additionally, there are often systems and programming constraints. Dealing with Unauthorized Deductions 1. Send an e-mail with the deduction information to the appropriate accounts receivable person at the vendor. 2. Send a form letter to the appropriate person at the vendor detailing why the deductions were taken. Make sure to include the invoice number and the dollar amount of the payment. 3. Keep scrupulous notes in the files related to any deductions taken. Then when the calls start coming, refer to your notes for an easy solution. 4. Refer the calls to the appropriate purchasing executive. This is where the calls should go, but rarely do, in most organizations. 5. Limit the hours when phone calls will be accepted to resolve discrepancies. Dealing with Unauthorized Deductions 6. Set up a separate phone number to accept phone calls regarding discrepancies. Instruct callers to leave all pertinent information, including: Vendor name Invoice number Amount paid Check number Check date Nature of the problem Phone number, fax number or e-mail address where information regarding the resolution of the matter can be sent. Dealing with Unauthorized Deductions 7. Develop a form to address these complaints. E-mail it to anyone with a problem, instructing them to e-mail the form back. At the discretion of management, this form can be forwarded to purchasing or whoever authorized the payment for resolution. 8. Work with purchasing to establish a mechanism for informing vendors about deductions before the inevitable call comes regarding short payments. Payment Timing Realizing the time value of money, some companies have taken a long, hard look at the way they pay their bills. Many have come to realize that if they pay a 2/10 net 30 day bill on the eleventh day and take the discount, their vendors will not complain—so they take the process another step further, and another and another. They are holding onto their money as long as they can. When large sums of money are involved, the extra income earned by delaying payments can be substantial, especially if it can be done for many days. Payment Timing The trick is not to offend valued suppliers or hurt the company’s credit rating. Some do stretch payments in a very organized fashion, even hiring professionals to advise them on the implementation of the practice. The decision to stretch or not to stretch is not one that should be made in the accounts payable department. It should be a conscious decision on the part of the company and should only be undertaken with the express approval of senior management. Otherwise, everyone will look the other way until a valued vendor complains or puts the company on credit hold. Then all sorts of havoc will break loose—none of it good for accounts payable. The “Did You Get My Invoice?” Call Let’s face it—vendors want to be paid, and they want to be paid on a timely basis. In fact, if most had their way, they wouldn’t even offer payment terms. They’d either get cash in advance (CIA) or cash on deliver (COD).Additionally,many are running on a tight budget and do not have a lot of spare cash lying around in case your company decides not to pay for a couple of extra days. Thus, to circumvent the payment- timing folks and to improve their own cash-flow projections, some credit managers have taken to calling their customers in advance of the payment date. This is what is sometimes referred to as the good will or PR call. The credit manager calls the accounts payable manager to inquire if the invoice was received and if there are any problems with it. Now on the face of it, this might seem absurd. But, sometimes these folks have good reason to call. Some companies will not contact the vendor when there is a problem with an invoice. They simply wait until the vendor calls looking for payment—sometimes as much as 45 days after the due date—and then start discussing the problem. This is really not fair and is the root of these phone calls. The “Did You Get My Invoice?” Call Thus, credit departments began calling in advance to identify and solve unresolved issues. Unfortunately, it has occasionally gotten out of hand with collection personnel calling all customers with large balances. Summary Unearned discounts and unauthorized deductions are two issues that cause conflict with vendors, despite the fact that most are ultimately allowed. Finding ways to eliminate this source of conflict will ultimately lead to a smoother relationship with the vendor and fewer interruptions from these vendors about short payments.