Thursday, August 21, 2008

Risk of Accounts Payable

It is not that accounts payable itself is a risk it is the status of accounts payable that may represent a risk. The CFO needs to assess accounts payable from the standpoint of the tolerance of the vendors. If Accounts Payable is overdue how are the vendors reacting? When I was in the ski retail business the terms for product received in August was December 10 or January 10. If you were 30 days late you would get a call, but a quick explanation that you haven’t had any snow usually cooled the vendor for another 30 days. Sometimes you could even re-date some invoices until the following fall. I am not saying that this is the case in most industries, but you need to know what the vendor tolerance is.

From a housekeeping standpoint the CFO needs to make sure that all of the vendor invoices are entered into the system with proper amounts and due dates. If this is inaccurate you will get vendor phone calls that could have been avoided. It is always best when the company calls a vendor about an anticipated problem versus the vendor having to call. It usually impresses the Vendor’s credit manager when the Company initiates the call because it shows the company is on top of the situation and is proactive. An important CFO Service is to determine which vendors need to be called proactively and establish a payment plan for any past due invoices and a plan for paying for new merchandise.

Paying for new merchandise to a vendor you are behind with can get dicey. The reason is that if a vendor makes it difficult for the company to get new merchandise (for example requiring COD on new shipments) then there is a natural tendency for the Company to look to another vendor who will give the Company terms. When that occurs, the Vendor who you are past due with gets incredibly upset because they not only are carrying a receivable but they are losing business. The CFO needs to manage this delicate balance and needs to be aware of this dynamic.