Keeping Your Suppliers Happy
This article is written for the benefit of finance managers or anybody who has to manage a process of paying suppliers.
Purchase Ledger/Accounts Payable processing Whatever IT system you use, there should be a mechanism in your company that ensures no invoice is cleared for payment unless the goods or services it covers have been properly ordered, delivered, and are charged at the correct price.
If you are going to keep your suppliers happy, you need to ensure that invoice processing happens as quickly as possible.
Discuss with your staff a performance target that all purchase invoices should be cleared for payment within, say, 5 working days of receipt.
(Don't just impose the target!) Your staff will almost certainly tell you that for 85% of invoices this is no problem, but that there are some special cases that will make this impossible to achieve.
You need to review these special cases one at a time and eliminate the reasons for their slow processing.
Typical reasons & responses include: · The invoices need to be signed by a manager who is regularly out of the office.
o Set up a system of emailing scanned copies or summaries of the invoices for remote approval.
· The supplier's invoices rarely match with the orders.
o Talk to the people who raise the orders about amending their process to give more accurate information.
· The supplier's invoices are a mess and very difficult to interpret.
o Talk to the supplier about improving their layout or providing additional information.
If this doesn't work, talk to your buyer about finding a different supplier, using the argument that there are high hidden costs with poor invoicing.
You need to adopt a continuous improvement approach, always looking for new ways to streamline your processes.
Supplier chasing and payment runs Your objective in organising payment runs is to keep to a minimum the chasing calls & letters that you receive from suppliers.
These are an annoying distraction, adding nothing to your company's profitability & impairing your department's efficiency.
If your suppliers know with confidence when you will pay them, they won't bother to call.
The sort of statement you want to make to them is: "We clear all purchase invoices within 5 working days of receipt.
We make a (weekly/fortnightly/monthly) payment run so that money is in the bank on a Friday for all invoices cleared by the previous Tuesday.
We would prefer it if you didn't telephone us unless you feel we are not meeting these commitments.
You could improve the speed of clearance of your invoices by (providing a geographic breakdown, subtotalling by project, or whatever other improvement is required.
)" If you are able to make those statements and stick to them, you should see a reduction in interruptions from phone calls.
Building Relationships Internally Quite commonly, the only time you will deal with certain managers in your company is when their suppliers have put them on stop & they are unable to continue with operations.
They are frustrated and angry, blame you, and expect you to resolve the problem at once.
Surprisingly often, the problem is caused by the complaining manager who hasn't raised an order or signed off an invoice.
These situations do need to be dealt with urgently, as the company's operations have to continue.
But it is far better to prevent them from arising in the first place.
You need to make it clear to everyone involved in ordering goods or services that they must adhere to procedures for raising and signing off documents.
If they don't do so, you can't pay the supplier, who will put you on stop.
A few examples of this happening can help to re-inforce the point.
Externally If a supplier has put you on stop, they will probably take a firm line with your buyer.
However, if you can get through to someone in their finance department, you can often persuade them to take you off stop if you give some undertakings to pay them soon.
However, if you don't keep to your undertakings, then this will only work once.
If you have a particular supplier who represents a high proportion of your purchases or whose invoices cause you severe difficulties, a face-to-face meeting with your opposite number is a good idea.
This person will have exactly the same problems as you do and will appreciate a common approach to improvements.
You may also be able to make a deal whereby you delay payments at your year end, while advancing payments at their year end, if they are at different dates.
Not enough cash? The process of paying all cleared invoices on a regular basis works well if you have money in the bank.
But not every company has the means to do this.
As a professional person, you will always behave ethically.
If your company has entered into a contract with a supplier to pay on certain terms, this should be honoured.
You will never make a dishonest statement to a supplier that they will be paid on a certain date when you know this is not true.
Far better to be open and say to the supplier that you won't be able to pay them until a given date.
You may be able to negotiate longer payment terms with some suppliers.
On the other hand, it is commonly understood, if not accepted, that payment periods sometimes slip.
You also have a responsibility to your company to ensure that it maximises its cash flow and stays within its banking facilities.
How do you resolve this dilemma? Only you can decide what is the right action to take in any given circumstance.
Ultimately if your company is under-capitalised or unprofitable the Board needs to tackle this issue rather than expecting you to finesse it by juggling payments to suppliers.
Conclusion For many finance departments, purchase ledger and supplier payment represents the biggest single use of manpower.
By using the ideas in this guide, you can minimise this use of resources, improve your cash flow & cut down on interruptions from discontented suppliers or buyers.
Key Points
Purchase Ledger/Accounts Payable processing Whatever IT system you use, there should be a mechanism in your company that ensures no invoice is cleared for payment unless the goods or services it covers have been properly ordered, delivered, and are charged at the correct price.
If you are going to keep your suppliers happy, you need to ensure that invoice processing happens as quickly as possible.
Discuss with your staff a performance target that all purchase invoices should be cleared for payment within, say, 5 working days of receipt.
(Don't just impose the target!) Your staff will almost certainly tell you that for 85% of invoices this is no problem, but that there are some special cases that will make this impossible to achieve.
You need to review these special cases one at a time and eliminate the reasons for their slow processing.
Typical reasons & responses include: · The invoices need to be signed by a manager who is regularly out of the office.
o Set up a system of emailing scanned copies or summaries of the invoices for remote approval.
· The supplier's invoices rarely match with the orders.
o Talk to the people who raise the orders about amending their process to give more accurate information.
· The supplier's invoices are a mess and very difficult to interpret.
o Talk to the supplier about improving their layout or providing additional information.
If this doesn't work, talk to your buyer about finding a different supplier, using the argument that there are high hidden costs with poor invoicing.
You need to adopt a continuous improvement approach, always looking for new ways to streamline your processes.
Supplier chasing and payment runs Your objective in organising payment runs is to keep to a minimum the chasing calls & letters that you receive from suppliers.
These are an annoying distraction, adding nothing to your company's profitability & impairing your department's efficiency.
If your suppliers know with confidence when you will pay them, they won't bother to call.
The sort of statement you want to make to them is: "We clear all purchase invoices within 5 working days of receipt.
We make a (weekly/fortnightly/monthly) payment run so that money is in the bank on a Friday for all invoices cleared by the previous Tuesday.
We would prefer it if you didn't telephone us unless you feel we are not meeting these commitments.
You could improve the speed of clearance of your invoices by (providing a geographic breakdown, subtotalling by project, or whatever other improvement is required.
)" If you are able to make those statements and stick to them, you should see a reduction in interruptions from phone calls.
Building Relationships Internally Quite commonly, the only time you will deal with certain managers in your company is when their suppliers have put them on stop & they are unable to continue with operations.
They are frustrated and angry, blame you, and expect you to resolve the problem at once.
Surprisingly often, the problem is caused by the complaining manager who hasn't raised an order or signed off an invoice.
These situations do need to be dealt with urgently, as the company's operations have to continue.
But it is far better to prevent them from arising in the first place.
You need to make it clear to everyone involved in ordering goods or services that they must adhere to procedures for raising and signing off documents.
If they don't do so, you can't pay the supplier, who will put you on stop.
A few examples of this happening can help to re-inforce the point.
Externally If a supplier has put you on stop, they will probably take a firm line with your buyer.
However, if you can get through to someone in their finance department, you can often persuade them to take you off stop if you give some undertakings to pay them soon.
However, if you don't keep to your undertakings, then this will only work once.
If you have a particular supplier who represents a high proportion of your purchases or whose invoices cause you severe difficulties, a face-to-face meeting with your opposite number is a good idea.
This person will have exactly the same problems as you do and will appreciate a common approach to improvements.
You may also be able to make a deal whereby you delay payments at your year end, while advancing payments at their year end, if they are at different dates.
Not enough cash? The process of paying all cleared invoices on a regular basis works well if you have money in the bank.
But not every company has the means to do this.
As a professional person, you will always behave ethically.
If your company has entered into a contract with a supplier to pay on certain terms, this should be honoured.
You will never make a dishonest statement to a supplier that they will be paid on a certain date when you know this is not true.
Far better to be open and say to the supplier that you won't be able to pay them until a given date.
You may be able to negotiate longer payment terms with some suppliers.
On the other hand, it is commonly understood, if not accepted, that payment periods sometimes slip.
You also have a responsibility to your company to ensure that it maximises its cash flow and stays within its banking facilities.
How do you resolve this dilemma? Only you can decide what is the right action to take in any given circumstance.
Ultimately if your company is under-capitalised or unprofitable the Board needs to tackle this issue rather than expecting you to finesse it by juggling payments to suppliers.
Conclusion For many finance departments, purchase ledger and supplier payment represents the biggest single use of manpower.
By using the ideas in this guide, you can minimise this use of resources, improve your cash flow & cut down on interruptions from discontented suppliers or buyers.
Key Points
- Work on your systems to ensure they are as efficient as possible
- Target a reduction in phone calls received from suppliers chasing money
- Build relationships internally and externally
- You may still have to delay payments, but don't compromise your ethical standards