Prompt pay - Long tutorial on receivables.

Posted by Charles Curry - Anaheim, CA - USA - on October 03, 2000 at 11:25:32:

There are a lot of small businessmen, particularly in the trades, who "shoot themselves in the foot," where accounts receivable is concerned. They fail to do the things required of them by time-honored tradition, and produce poor results. Then they howl that a company "pays slow," when the situation is entirely of their own making.

Suppose that locksmith Joe Schlunk goes to the XYZ Corp and rekeys six locks @$15.00. Before he starts work he properly gets a signature from the office manager, who ordered the work over the phone. When he is ready to leave, the office manager is out of the building, so a congenial department manager signs, and accepts a copy of the work order, often one marked "Invoice."

Anxious to go to lunch, or late for a meeting, the department manager throws the piece of paper down on his desk, where it becomes lost under a growing mound of paper.

Joe Schlunk goes on his way, thinking that he has "submitted his bill," but he has not. He has at most provided a "receiving document," which may or may not ever find it's way to the Payables Department.

Joe Schlunk, on returning to his office should immediately mail an "Invoice" to the Accounts Payable Department at XYZ Corp. If he does not, the payment cycle is usually not begun.

No payables department ever pays a bill, until three things come together:

1) Authorization to purchase (a purchase order copy, or the signature of a department manager or budgetary
authority okaying that a "discretionary (non-purchasing department) purchase" was made, and is to be charged to his budget);

2) Proof of delivery, usually a "receiver," but sometimes the budgetary authority's say-so and "okay to pay";

3) An invoice. It is this document, mailed to the Accounts Payable Department, and this document alone, that initiates the bringing together of the three requisite documents, and the beginning of the payment cycle within XYZ Corporation.

On a frosty day in July, it just might be that someone will take an interest in seeing that Joe Schlunk gets paid, but it's very unlikely that anyone will. Just maybe, the department manager will return the "receiver" to the office manager. The office manager may be a neat person, who walks the copy into the Payables Department, points out that the copy is marked "Invoice" and initials where they demand, that the purchase was authorized, and the services were received, and that the invoice is "okay to pay." It may have to be sent to the maintenance supervisor, for his signature, too.

If all of this happens as described, Schlunk will get paid on the tenth of the following month, unless the company is one that is "stretching payables." It's extremely unlikely to happen this way, however, and the more likely scenario is that the document remains moldering at the bottom of the department manager's in-box. Eventually, Joe Schlunk, who did the work on July 2, realizes that August 10 has come and gone, and he hasn't received his ninety bucks, and he's sore because it's been nearly six weeks, and this company is a "late payer."

In reality, he has never even started the payment process, because he has not billed. When he has postmarked an Invoice, mailing it to the Accounts Payable Department, THEN he has billed, UNLESS this is the first bill he has ever submitted to XYZ, in which case he has to send a little note along, listing certain particulars for his company. If he is a corporation, he'll have to provide his Federal Tax Number, at a minimum, or as an individual proprietorship, a Social Security Number. They may still send him back a form to be filled out, to establish himself as a vendor, which must be returned, before they can pay him anything.

Let's get back to Joe Schlunk, who hasn't submitted a bill to the Accounts Payable Department yet, and for whom the process of getting paid hasn't even started. He thinks it has, because he naively left his "invoice," believing in miracles. On the 26th of August, he sends a statement, including the invoice # and amount, and settles down to wait, again. The statement, arriving on the 29th of August, is better than nothing, for it provokes a bit of curiosity. It's received in the Accounts Payable Department at XYZ, but one of the clerks sets it aside. They have no record of any such vendor, let alone a purchase order, a receiver, or an invoice.

Within a few days, the clerk wanders around, and learns that some lock work was done in early July, under the purview of the Office Manager, Ms. Beadyeye. But the Office Manager has no receiver. After two or three days, it still cannot be found, and the clerk calls Joe Schlunk, who gets back to her in a couple of days with the information that his "invoice," such as it was, was submitted to Mr. Fatbum (the Director of Marketing and Sales).

Mr. Fatbum is out of town, and when he gets back, he is queried, and "sort of remembers" signing something for the Office Manager, but he swears he passed it on, or maybe he didn't. A couple of days later, when he hasn't been able to find it (he didn't have time to look) the clerk again contacts Joe Schlunk, and asks that he re-invoice, or send a duplicate, because they have no record.

Obviously, they cannot pay, without knowing what they are paying for, and making sure the amount is correct. More importantly, they MUST know what account #'s to apply.

If it's a safe they have bought, the money has to be taken from the capital equipment acquisitions budget (actually items costing > $1000), and approved by one person, with the value of the safe put back into the capital equipment account. But, if it's lock rekeying, the money has to be taken from the building maintenance budget, and approved by a different person. Coincident with the disbursement, the sum has to be entered in "upkeep disbursements." After all, double-entry bookkeeping is double-entry bookkeeping, and without general ledger account numbers, one is up the proverbial creek without a proverbial paddle.

General ledger account numbers are how the major corporation is kept on an even keel. But Joe Schlunk doesn't know from "general ledger," (keeping his accounts in a shoebox, as he does), and he just wants his money. A few days later, he gets around to xeroxing the invoice, and a few days after that, it arrives at XYZ Corp. He didn't mark the envelope for the Accounts Payable Department, so it takes a few more days to get opened with all of the general mail, advertising, etcetera, and to be sent on to Payables.

It is now September 26, but since Joe Schlunk is not an "approved vendor," they can't accept the invoice for payment. Because they are super-efficient in Payables, they send out the form to Joe Schlunk, but simultaneously begin to collect the approvals, even though they have "technically" not accepted the invoice. Meanwhile, Joe Schlunk, noting bitterly that the incoming form and demand is not a check, throws the envelope aside angrily, and does nothing about it for three weeks, until a clerk calls from XYZ and tells him that they are now ready to pay his bill, but can't do so until he sends the form. It takes him four or five days to find and send it, but fortunately he sends it in an envelope provided with the demand, which is marked "Attn: Accounts Payable" and it thereby bypasses the mailroom snarl, which is fortunate, because it is nearly the end of October, and the invoice winds up being "received" and stamped "in", in October, rather than November. It's a "lucky break" for Schlunk. A few more days, and he would have been into November, and slated for payment in December.

As it happens, XYZ Corp, which "redlines" (to take advantage of early payment discounts, mails the check out before COB (close of business) on November 9th, taking the 2% discount for "net ten days" early payment. Schlunk has not offered the 2%, but it's an understood part of business, and many companies take it routinely, and their vendors do not argue. Because the 10th is on a Saturday, under the UCC (Uniform Commercial Code, which is adopted by reference in many states, just as NFPA is adopted by reference by many municipalities they actually have until COB on Monday, to mail the bill when due ("paid when postmarked") and some companies think that "not late" is "early" and take the discount up through and including tenth prox.

Now Schlunk is angry. He receives his check on Tuesday, November 13th, with 2% taken off for "early payment," and he's fried. By his lights, XYZ has taken four months and nine days to pay, and they're a bunch of crooks.

Who's wrong?

Schlunk, of course!

Why?

For not understanding how business is done, and not taking the trouble to find out, after twenty-five years in the trade. He's trying hard to bend the world to his will, and it ain't going to happen. He freely uses terms like "net 10th prox," and "ninety day aging," but if the truth be told, he has no idea when the clock starts, or why. He doesn't know what's really fair, or why things are done a certain way - and he'll tell you so. When he presents his bill, by God, they better pay, and that's that.

If he was really smart, he would have called up to the Payables Department before leaving the premises, and either would have spoken to the Payables Manager, Mr. Tuchas, or sweet-talked some clerk, depending on his style. They would have been bowled right over by a TRADESMAN who knows how it's done, and would have run right down to the lobby with the "Vendor Approval" form. Not only that, but when his invoice came in with the approval form, in a day or two, he probably would have received extra special treatment, because he's a friendly and cooperative fellow, who actually tried to make their job easier.

The way I see it, it's easier to "go with the flow," than to bend he world to your will. So far as I can see, the sun should never set on unmailed invoices. And a bill is never mailed, except it's marked ("Attn: Accounts Payable").

Someone lately complained about a Radio Shack store manager holding up invoices, and it reminded me of a long ago experience. I was consulting, as an individual, with a company worth billions, and month after month after month, they failed to pay my invoices. When I was flat stony broke, a series of chance events put me in contact with one of the veeps. I told him that I had not been paid for four months, and was desperate.

Turned out the bastard I had been working for had all of my weekly invoices neatly stacked up under the pile in his in-box, and had never sent even one of them on to Payables. His boss had retained me, and I was earning nearly twice what he was, so he was "punishing me," all the while blaming it on the company's slow pay. Over the next couple of weeks he was mostly "out," and then it was announced that he was "leaving to pursue another opportunity." He never once looked me in the eye, before he left, so I imagine that they beat him up pretty good, and told him that he was lower than a snake's belly.

The moral of the story (it actually has several) is ALWAYS send the bill to Accounts Payable, and let THEM get the necessary approvals, or coordinate the "receivers." Never put anyone in charge of your fate but Accounts Payable (the guys who have the responsibility to see that the bills get paid.) If the "store manager" lays down other rules, just tell them "My company has its own rules. The invoice goes to Accounts Payables, the receiver to the local manager."

You can even explain why it is. "We've had local managers sit on the paperwork, before, and this just keeps things moving. It's the only way to do it."