Best Practices for Paying Vendors

It may seem obvious that the most important business practice is paying your bills. However, there are many ways to pay bills, and the choices you make can directly affect your bottom line. In one study conducted by the credit card company Visa, they found that those who used best-practices saved “an average of $1.8 million to $8.3 million annually, not including potential cost saving associated with vendor discounts or front-end processing efficiencies.”

Here are some of the practices that Spartina endorses, culled from our experience, as well as Visa and other sources.

Manage supplier relationships

1. Optimize the number of suppliers. In the Visa study, 90% of the companies studied spend with a preferred vendor. There are many reasons for doing this. Tracking is easier. Discounts and preferential treatment can be negotiated more easily. Some leniency can evolve in payment terms. For example, Spartina recommends creating a close relationship with a single law firm, and then negotiating the ability to pay the fees over time, when you are in start-up mode and cash is short.
2. Get Favorable payment terms. Create a contract as soon as you begin the relationship that spells out the terms. The vendor may request 30-day payment, but if they want your business, you can decide the payment terms that you find most favorable.
3. Ask for an early-payment discount. If vendors would like payment in 5-10 days, you can offer that in exchange for a 5% discount.

For more on getting discounts, see this article .

Set up a system for purchasing

1. Simplify your approval process, but don’t eliminate it altogether. Most companies require an approval from the person who placed the order before the accounting people will pay the bill. It is also useful to have the CFO or CEO or both approve any payments over $10,000.
2. Make purchases electronically using a credit card for simple things such as office supplies. Again, in the Visa study, 75 percent of office supplies were purchased on-line.

Set up a process of receiving invoices

This includes matching invoice information to purchase records, and selecting the most cost-effective payment method.

1. Consider using PayPal for paying those vendors who have a Paypal account.
2. Eliminate paper invoices as much as possible. As a minimum, vendors would submit their bills to you electronically, via PDF or DOC files. If there is an electronic bill system in place, you could require your vendors to log in and submit the bill via that system, which ideally integrates with your accounting system.
3. Eliminate manual check payments. In the Visa study, 71% of the payments by the selected companies were automated. It goes without saying that writing a check and mailing the check is now considered stone-age. There will still be times that you have to mail the check, but the check should be electronically produced, either via your bank or your accounting software. Even better is to use the on-line bill paying systems from your bank or accounting software to produce and mail the check.
4. Consider outsourcing bill paying functions when you have a high volume to do. Many companies, such as Corefino, will take on all the responsibilities of paying the bills, and include an approval process to make sure there is accountability.
5. Be sure to include the correct account number when you pay an invoice so that you are properly credited.

Note that requiring electronic bills from your vendors is something that is becoming a necessity. Large companies such as Blue Cross, Health Net, MCI and Earthlink now charge its customers for paper bills. To avoid the fee, customers must sign up for e-bills at the company’s Web site. When you are paying independent contractors, for example, consider that you could deduct from their payment if they do not use an electronic invoicing system, or if they cannot accept automated payments.

Monitor the financial information

1. Control your spending and use your accounting data to monitor it. Always know where your money is going.
2. Document all the bills that are paid and file appropriately.
3. Avoid late fees at all costs. Never let a bill become overdue. If you are disputing a bill, send a partial payment.

References: Procure to Pay Best Practices