Large companies are being increasingly criticized for their slow payment to small suppliers. Reports on research by, among others, the London Enterprise Agency and the Association of Independent Businesses show there is some justification for the complaint and the chief general manager of the Co-operative Bank has emphasized the interdependence of large and small firms.
A recent check on payments made by a number of well-known companies showed that the average time taken from date of invoice to payment varied from five weeks to more than twelve weeks. Most companies paid after about eight weeks but some invoices took much longer. Even when compelled to give such extended credit it may be impossible for the small business to cut off supplies or go on to a pro forma invoice basis without doing permanent damage to its main markets.
However, whether or not large companies can be convinced that they should do more to help their small relatives, it is often Possible for the latter to get cheques sooner by examining the payment process stage by stage.
All companies of any size are handling hundreds, and often thousands, of pieces of paper every day. To control this flood of orders, delivery notes, invoices, cheques and other documents they have laid down rigid systems for processing them efficiently.
Their methods of purchasing from and payment to small suppliers are no exception. Once a purchase invoice, for example, has got into the system then its progress is relatively automatic. Whether this movement from input to payment is a matter of weeks or months, the invoices of the small company will not normally be treated any differently from hundreds of others unless they require special attention for some reason. They are in the best position for payment if they pass without delay through each stage from receipt of invoice on to the ledger and finally to payment.
The comparatively unsophisticated organization of the small firm is competing for payment with the highly organized invoicing and cash collection departments of larger companies.
The latter have examined every link in the chain from sales invoice to payment both in their own organization and in the customer’s. The small supplier must look at this process with equal care if he is to have any chance of receiving payment as soon as his larger competitors.
The main aim is to get the invoice on to the customer’s purchase ledger before it closes for that month. Surprisingly, perhaps, many large companies close their ledgers before the end of the month concerned. That is, if it is their policy to pay October invoices in early December, then for their purposes October may only be invoices received up to 25 October or even earlier. Any invoices received after that date are classed as November and paid in early January.
Companies vary so much in their purchase ledger timetables that it is difficult to generalise. What is certain is that a few days’ delay in sending off invoices, particularly round about the customer’s close off date, can result in those invoices being paid four or five weeks late. The purchase ledger clerk, purchase manager or accountant of each important but slow paying company should, therefore, be asked for details of their timetable.
If it is clearly explained that the reason for the call is to find out how their system works so that your invoices will be paid more quickly, the cause of the delay will soon be found.
It may be that your invoices, though paid late, are not paid any later than other suppliers, but it may be the case that your invoices are getting on to a later payment run than necessary and action can be taken to rectify the situation. The lessons learnt on a few such calls can often be applied generally.
It is obvious that invoices must be raised and despatched promptly- If, because of rising postage rates, a policy has been adopted of holding invoices until several have accumulated it should be reconsidered if it might lead to that customer’s ledger being missed for the month. In some cases first class post may be advisable.
All efforts to get invoices to customers quickly are wasted if queries cause them to be treated as exceptions at the receiving end. Needless to say, invoices must be correctly addressed, priced, extended and totalled, but one common cause of delay is order numbers. The need for these varies from the essential to merely desirable.
In the first case an invoice without an order number will be returned. This highlights the matter, which can be noted for future business. In the latter case the invoice will be circulated round the organisation until it reaches the person who ordered or received the goods or services. The invoice is delayed in getting on to the ledger, but to the supplier there is no apparent reason why he gets paid an extra month late.
Customers’ staff placing orders, perhaps on the telephone, do not always tell the supplier he should be given an order number. It may, in any case, have to be obtained from a central purchasing department and arrive after the invoice has been sent. It is, perhaps, best for the supplier to insist that the name and department of the person placing the order is put on the sale invoice when an order number is not received.
The date on the invoice should normally be the date of despatch and not that of invoice preparation if later. This is particularly important if goods are despatched in one month and invoiced, perhaps the next day, in the following month.
The majority of firms close their purchase ledgers three to ten days after the month end and their ‘cut off or finishing date for that month will usually be the last day of the month.
One company, finding a fall in its cash collection rate, discovered that a computer operator had accidentally dated a batch of invoices with the next month instead of the current °ne. The customers had, therefore, held these invoices back until the following month’s ledger.
Some queries on matters such as shortages, returns and price cannot be avoided.
But other errors that could cause a hold-up in payment will be found if all invoices of a significant amount are checked f0r essential detail before posting.
Examination of one’s own and customer’s procedures in the way described can pay substantial dividends in speeding cash flow.
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About the Author: Marie Mayle is a contributor to the MegaHowTo team, writer, and entrepreneur based in California USA. She holds a degree in Business Administration. She loves to write about business and finance issues and how to tackle them.