Any successful business needs to keep a close eye on its cash flow and disbursements, the payment out of money, in order to stay afloat. And with a post-COVID recession and soaring inflation rates, everyone is trying their best to minimize expenses and maximize profits (or at the very least, minimize loss).
Businesses are changing the way they operate, from embracing new technologies to completely reorganizing existing business models. Capital needs to be protected. Gaps need to be covered. Processes need to be tightened.
Whether they like to admit it or not, a lot of businesses are being forced to count their nickels and dimes as never before. Maybe you’ve noticed that the coffee machine hasn’t been replaced or medical insurance reimbursements have shrunk. Perhaps you’re the one forced to make these money-saving decisions for the company. With all this worry about money, there is one area that can be focused on and improved to help your business thrive in a hostile environment: the accounts payable process.
Accounts Payable: The Process
Accounts payable (AP) is the money owed by a business to its vendors, suppliers, and creditors. These are short-term debts that are usually resolved in a single payment cycle. AP can also refer to the department or employees responsible for resolving these short-term debts.
The accounts payable process has several steps, each vital to the lifecycle of a business. First, there is a request for goods. Say you’re working for a hotel chain. The first step of the process could be the housekeeping department requesting a new batch of towels to replace worn out or damaged items.
When this is approved, the next step, purchasing, is begun. The purchasing department will request quotes from several linens suppliers and determine the best quality for the best price. After a supplier is selected, a purchasing order (PO) is drawn up.
Next, to continue our example, the hotel would receive the towels and the supplier’s invoice. The received goods are then accounted for with the creation of a receiving report.
After that, the accounts payable will be recorded as a “liability.” This chalks up to money that is still owed by your company. The employee recording the accounts payable will use the purchase order and receiving report to do so.
Finally, your company will make the payment to the linens provider and settle the accounts payable. Payment can be made in many ways, but the best way is to pay instantly and electronically through a reliable tool like BirchStreet Pay which will save you valuable money and time providing a cash back rebate. BirchStreet Pay is the smarter way to pay.
Accounts Payable: The Problems
Now that you know what you’re dealing with, the ways in which the AP process could be involved in problems with the company’s finances are relatively obvious. Poor record-keeping could lead to missed or late payments to vendors. This could damage your standing with the vendor and may even lead to problems obtaining the goods required to keep your business running.
The use of paper checks to pay your vendors can easily lead to delays, extra expense, and open your company up to fraud.
These problems have relatively simple fixes: use software to keep track of your accounts payable and use ACH payments or virtual cards to pay vendors. But the problem we will be tackling today is something that takes a few more steps: avoiding duplicate payments.
Duplicates Hurt: Need We Say It Twice?
In all the careful cost-cutting and dime-saving that is becoming more and more common in today’s tough market, duplicates are doubly painful. Here, we’re referring to duplicate payments to vendors in the AP process.
What’s the use of not replacing a broken, $65 coffee maker when you’re paying companies hundreds or thousands of dollars for their goods or services twice? All you get is tired, cranky employees and zero net dollars saved.
This may sound silly to you. Why would my company pay a vendor twice? We’d certainly catch that before it happened. It does happen. And often. For top performing companies, duplicates (or other forms of erroneous payments) make up 0.8% of disbursements. That may seem like a small percentage, but when you’re talking hundreds of thousands of dollars in disbursements, that $65 lost for a new coffee maker is not even a drop in the bucket.
Every company needs a game plan to eliminate duplicate payments. Here we’ll discuss 6 steps to avoiding duplicate payments and saving your company thousands or hard-earned dollars.
Tip #1: Consolidate Your VMF
Your vendor master file (VMF) is where you keep track of all the vendors with which your company does business. Though all companies should theoretically have a VMF, that does not mean it’s pretty.
Many companies will add vendors to the file as they go, thinking they are on top of things, when in reality they are just adding more informational junk to an over-sized, Frankenstein-esque file.
If your VMF hasn’t had any “maintenance” in the past year or so (and we know that it’s often a much longer time than that), now is the time. Make sure that each vendor with which you do business is accounted for, but only accounted for exactly once.
Look out for duplicates of the same vendors, such as “Terrific Towels Inc.” and “Terrific Towels.” Some well-meaning employee may see that we haven’t made the payment to the towel vendor this month and send another payment, when in reality it has already been paid but accounted for under another name. And just like that, you’ve paid $1,500 twice.
Tip #2: Standardize the VMF Entries
Eliminating duplicate vendors is not the end of your VMF maintenance. Often, the VMF (often a spreadsheet), is not filled out in a standardized fashion. This can lead to a lot of confusion and need we say it? duplicate payments.
Determine whether you will use “the” before the names of vendors. Determine whether you will use Y’s, X’s, or check marks to indicate that something has been completed. Decide when in the process something counts as “complete” and that those filling out the VMF comply with those timeline standards.
Tip #3: Make Sure You Have a W-9 From Each Vendor
It is imperative that you have a W-9 from each vendor with which you do business. Consider making this a part of your VMF form to make sure it’s not overlooked.
W-9s require the name of the business and individual you are dealing with, their relationship to the business, its address, taxpayer identification number (TIN) which is either a social security number or an employee identification number, and a signature. This way you will know who you’re dealing with and have their information when you need it.
Each W-9 should be on the VMF only once. If an entry lacks a link to a VMF, it may be a clue that the entry is a duplicate.
Tip #4: Collect and Verify Tax Information
Once you have the W-9s, verify the taxpayer identification numbers with the TIN-matching tool on the IRS’s website. This way you won’t make mistakes when making payments or dealing with the company generally. Plus, you’ll already have all the (correct) information you’ll need when it’s time to file taxes for your business.
Consider having another section of your VMF for indicating that the TIN has been matched with the IRS website. This can also help reduce duplicates in your files.
Tip #5: Separate Duties to Reduce Mistakes and Fraud
Don’t rely on one employee to deal with your entire AP process. Mistakes are human. Payments can be easily overlooked, duplicated, or, though we hate to admit it, used in fraudulent activities. Every step of the AP process should have at least two people working on it. No one person should set up a vendor relationship and no one person should be in charge of the VMF.
This “buddy” or “team system” will help reduce mistakes and confusion as long as the process is standardized, as discussed above. What’s more, two sets of eyes on each step go a long way for reducing the temptation of a dishonest employee to try and scam your company out of money.
Tip #6: Stay Vigilant
Don’t consider these one-and-done steps, like the directions to sew a pair of pants. You can’t consolidate your VMF, standardize its entries, and separate duties one time like you would buy a pattern, cut, and sew your clothing and then be done forever.
Your VMF will need to be looked over, reconsolidated, and checked for standardization within at least once a year. Your company will need to make sure that duties are remaining separated, and that no one employee has fallen into “specializing” in an important step of the AP process and leaving other sets of eyes out.
Using these 6 tips, your company will be able to reduce duplicate payments and save money in a time when money is often hard to come by.
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