Vendor management #1
I have just been updating my "50+ Ways To Improve Accounts Payable – Implementation Guide" (70 page PDF whitepaper + E-templates).
One secret to a 21st-century accounts payable operation is vendor management. Most organisations have too many vendors, and identical internal controls are applied to both large and small transactions.
Five principal groups
We need to manage our vendors and break them into six principal groups:
1. For large vendors where we will be requiring them to input their transactions directly into our AP system. We will provide these vendors with access to track their recent deliveries so they can see if any issues need resolving before we even make contact with them. The more your key suppliers' systems are linked to your AP system, the better. It is simply an issue of getting the two IT departments together around the same table. For these large vendors, the AP team should have a video link with their counterparts at least once every quarter to go over what's working well and what needs to be improved. Some organisations go through a scorecard with their major suppliers.
2. Medium sized vendors that will be sending PDF invoices that our system can read.
3. Utility, Freight, and Fuel suppliers who bill on a monthly cycle that can be moved slightly before month-end
4. Regular but small transaction suppliers who are paid outside the AP system via the purchase card (P-card) system.
5. Stationary supplies, Travel agency services where we direct our employees to a chosen national provider
6. Special vendors such as auditors, legal advisers, that are only used by certain authorised departments.
Vendor selection
We need to select vendors based on some criteria such as their IT competence, the quality of the product or service delivered, their delivery on time success and, of course, price.
Vendor terms and conditions
Large multinationals such as IBM pay their suppliers on 90-day terms. They think they're being very clever and improving their cash flow. However, this is, at best, a very simplistic view of cash management and, at worst, costly.
1. Suppliers will factor in this delay and, in most cases, charge for it.
2. They have missed the obvious savings of an early payment discount. If you offered your main suppliers seven-day payment terms for a 3% discount, you would be far better off taking this offer than organising a delayed payment.
3. Cash flow management is best addressed at inventory and accounts receivable. Accounts payable is a low-hanging fruit, but you should delay picking it.
Where you have some negotiating power, why don't you, subject to cashflow availability, negotiate a 3% cash discount for early payment?
Benefit from taking early payment discount (3%) over extended credit terms, for a multinational vendor with extreme bargaining power.
For a multinational with extreme bargaining power, it is still better for them to pay quickly to those vendors who are willing to give a 3% discount for payment in 7 days, as opposed to waiting until 90 days has transpired.
Benefit from taking an early payment discount (2%) over normal credit terms (40 days), for an SME with negligible bargaining power
For an SME, it is still worthwhile talking to major suppliers to see if they offer early payment terms. It is still better to pay quickly to vendors who are willing to offer, say, a 2% discount for payment in 7 days as opposed to an average of 40 days before payment, as shown below.
This early discount calculator is included in the E-templates.
Vendor checking
One of the best ways to improve security and reduce fraud is to ensure that only bona fide vendors are included in the vendor master file and thus paid.
There are a number of controls that you can instigate, and these include:
1. An independent check of all supplier details, such as address name, to their website and trade associations.
2. Ensuring that the bank account details supplied match an image of a deposit slip and that the banking system can match name and bank account together.
3. Have standard naming conventions so that a supplier cannot be entered in two different ways.
4. Ensure that two people are involved in entering supplier details into the system. Allowing one person to do this alone is a major weakness.
Other vendor management better practices
The other better practices include:
? Acquire a warehousing facility so that suppliers can rent space and store their consignment stock. The supplier is responsible for constant replenishment, e.g. core stock items (they need online access to relevant stock records), stationery, etc.
? Ensure all major suppliers will not deliver services or supplies without an order. For goods delivered without an order, do not accept them, so the driver has to return them to the supplier. The stricter you are, the less likely suppliers will repeat this activity.
? Create more national contracts which give you the ability to negotiate better deals and transfer processing to them.
? Have one stationery supplier and introduce consignment stationery cupboards on all floors in the organisation. See separate section.
? Ask utility suppliers who provide services to different branches to provide a consolidated invoice covering all branches, e.g. one telecommunications account for the company.
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