Make It Your Business: Take Control Over Your Accounts Payable

Vince DiCecco is a business training and development consultant and has been involved in sales, marketing and training since 1981. Contact him via e-mail at vince@ypbt.com or visit www.ypbt.com.

As the owner of a thriving sign and digital graphics business, you are perpetually subject to one deadline or another. Your workload seems overwhelming on a daily basis, and the responsibility to make the right business decisions every time is enormous. Good financial management of a business begins with a sound yet simple accounts payable (AP) system.

As a business grows, so do the headaches of its accounting functions. But regardless of the size of the company, adopting a system to control the cash flow in and out of the business is essential. Here are some tips and techniques to allow you to confidently respond in the affirmative to the questions above and, thereby, to enhance your profitability.

 

Establish a simple PO system

Many businesses make the seemingly innocent yet serious mistake of buying things without assigned purchase order (PO) numbers. I do not single out small companies as transgressors here. I’ve seen Fortune 500 companies allow department managers to place orders valued at thousands of dollars in materials and services without PO numbers.

Why does this create a problem? In audits of a company’s books, failure to assign PO numbers—or the practice of using “verbal POs”—was identified as the root cause of duplicate payments and fraud. But maintaining a purchase-order system does not have to be cumbersome.

I recommend generating coded PO numbers that provide information about who initiated the order and when it was placed. For example, you may want to have the first two letters of the PO be the initials of the person ordering the goods or services. The next series of digits could indicate the date the order was placed. I recommend using the YDDD format (sometimes erroneously called a Julian date) because it is unique, short, and tends to conceal the fact that it is a date. The first number is the last digit of the current year followed by the sequentially numbered day of the year. Halloween—October 31, 2017 and the 304th day of the year—would become 7304. Christmas Day—December 25, 2017—would be written as 7359. St. Valentine’s Day—February 14, 2018—would be written as 8045, and so on. Concealing the method behind your PO-number coding will prevent unscrupulous vendors, who may attempt to pass off bogus POs, from “cracking the code.” As for knowing that Tax Day—April 15th—is the 106th day of the year (in non-leap years), many calendars provide this kind of numbering.

Finally, the last two or three digits of the PO number, depending on the daily average of purchase orders issued, could represent the number of the purchase orders a particular person creates in a day. Thus, when your production supervisor, Joey Baccala, calls in his first order for sheets of coroplast on October 10, 2017, the PO number JB7283-01 would be given to the vendor. When Joey relays the order number to the accounting department and it is entered into the spreadsheet, the data can be sorted in a number of meaningful ways.

 

The importance of checks and balances

Once an order is placed, your company awaits delivery. When the ordered goods arrive, they are typically accompanied by packing slips. Insist that the person authorized to sign for deliveries opens the packages and checks the content against the packing slips. This person should note accuracy, or any discrepancies, on the packing slips. The shipment and the packing slip are then delivered to the person who ordered the goods. If the ordering party’s name does not appear in the address section of the label, the initials will be part of the PO number. The annotated packing slip is then checked against the purchase order. Again, any discrepancies, such as items on backorder, are noted on the PO. If the items need to be entered into an inventory system, that should be done immediately.

All paperwork, the purchase order, and packing slip (which sometimes doubles as the invoice), should be expeditiously routed to the accounting person/department. There is one cardinal rule every business must follow at this juncture: the person authorized to place the order shall not be the same person authorized to pay the invoice. Even Mom and Pop enterprises should keep these two functions separated. Why? When the person placing the order, signing for receipt of the goods, and writing out the check is one and the same, all sorts of questions of potential fraud can be raised during an audit of the books. Enough said.

Also, insist that all invoices, whether they arrive separately or are of the packing slip/invoice variety, go directly to your Accounts Payable delegate. When the invoice is date-stamped into accounting, it should be matched up to the PO. One final check is made: the annotated PO is compared to the invoice. Discrepancies are noted and investigated by contacting the originator of the purchase order.

 

Develop a fail-safe payment system

First, set up a simple payment system. If you are fortunate enough to utilize an accounting program, you are blessed with electronic reminders and automated payment features. If you do not use computer software, you may want to adopt the following filing system.

When you receive an invoice and determine it to be valid and accurate, next determine the due date for payment. For example, if the bill is due upon receipt, you should process the payment immediately. However, often the supplier will extend payment terms to your company. The most common payment terms are “Net 30” which typically means you have 30 days from the date of the invoice—generally the date of shipment from the vendor—to pay the bill.

I would recommend buying an accordion file with 31 pockets, numbered for each day of the month. Let’s assume today is the 21st of the month and your AP delegate receives an invoice dated the 15th. The terms are Net 30, making the payment due on the 15th of next month. The AP clerk should stamp the invoice “APPROVED,” issue the check, ensure copies for your records are retained, and prepare an unsealed envelope for the mail. The payment envelope is then placed into the pocket of the accordion file on the numbered day that the payment should be mailed—two or three business days before the 15th in this example.

Each morning, the AP clerk reaches into the numbered pocket corresponding to that day’s date and posts those payments. A tall red card, or other appropriate flag, should be placed in the appropriate pocket of the accordion file to indicate all payments forward of it have been paid on time. Once the payment is made, the retained copies of the paperwork are filed in a folder for that vendor.

Record-retention policies vary from company to company. My company retains records for a full ten years, while others consider five to be sufficient. Check with your accountant for a recommendation. The two prior years and the current one should be kept as hard copies. The modern day solution to file management is to scan the documents into Adobe Acrobat files (.pdf) right before physically filing them into the appropriate folders and cabinets. At least you will always have an electronic backup to the paperwork.

 

The time-value of money

What if I told you that your company could earn 73 percent interest on its money? Would you take me up on it? Of course you would!

First, your business must demonstrate proficiency in AP management through sustained practice of the system described above. As a result, you should be rewarded with an “A1” credit rating. It is at that point that you are well within your right to ask for extended or “advantaged” terms of payment from your suppliers.

The most common incentive offered by vendors is described as 2 percent 10 days, Net 30. This means that, even though they’re giving you 30 days to pay, if you expedite the payment to within 10 days of the invoice date, you can deduct two percent off of the amount due.

Consider the following scenarios involving your company, taking four equal amounts of $1,000 and spending/investing them each in different ways. In the first scenario, you purchase a $1,000 certificate of deposit that earns 1.25 percent interest. After one year, it has earned $12.50—or a whopping 3.4 cents a day. In the second scenario, you place a $1,000 order for goods, under the terms of payment “COD”–– cash on delivery. Obviously, no gain of any kind will be realized on this $1,000.

In the next example, a $1,000 order for goods is placed, but this time terms of Net 30 are offered. The goods are received on the same day as the invoice date, but your company doesn’t pay the invoice until the 30th day. The bill is “paid in full,” but only after 30 days of interest has been earned. At a 1.25 percent interest rate, the net gain is $1.02 (30 X 3.4 cents).

In our final scenario, your company negotiates “2 percent 10 days, Net 30” terms and places an order for $1,000 worth of goods. The vendor ships the order on the date on the invoice, you take receipt of the materials five days later, and you pay the bill on the 10th day. But, instead of paying $1,000, you send a check for $980. Net gain: $20.

How long would your money invested in the CD have to sit there to earn $20 in interest? Try 588 days. And what would the interest rate have to be to earn $20 on a $1,000 investment in 10 days? You guessed it: 73 percent. The moral of the story is to get your credit rating as high as possible, and then negotiate for the best terms possible. After that, be certain to take advantage of every payment incentive that comes your way. Good luck!