Implement Robust Controls to Allow for Healthy Business Growth
It is relatively easy to keep a tight rein on expenditures when a business is small. But, as your company grows and you take on employees, purchasing can get out of control. And you could find yourself asking questions like, who ordered this? Or, why on earth did we buy that?
Of course, when a vendor payment is already overdue, it’s way too late to begin asking questions. So, it would be best to implement robust purchasing controls and procedures when your business begins to expand. And the sooner you put those controls in place, the easier it will be to manage your accounts payable as the business grows. So, here are ten tips to help you manage your accounts payable (AP) systems.
1. Restrict Purchasing Authority
If you want to control purchasing, you must control who can order products and approve invoices and payments. Of course, it will become impossible for a business owner to make every buying decision when a company grows. Indeed, it would be counterproductive to try. So, the authority to purchase items must be delegated but controlled by predefined limits.
So, for example, you might authorize departmental managers to approve purchases for their department up to a set value. And purchases over that value must be countersigned by a senior manager. And you might want to insist that capital purchases require a second authorization, too. It will also help if you task managers with staying within budget.
The precise approval procedures you implement will depend on your business circumstances. But it will help control costs if you define and document purchasing procedures.
Related Article: How to Manage Creditors During a Cash Flow Shortage
2. Develop a List of Approved Vendors
It’s not only what employees purchase that counts. To manage accounts payable effectively, you will also need to control from which vendors your team buys products and services. So, you will need to draw up and periodically review a list of approved suppliers.
Having an improved suppliers list will help you maintain quality and control costs. You will be able to take advantage of volume discounts, for example. And you will be able to ensure that there is consistency in the products you purchase. A list of approved suppliers will also ensure that vendors are not selected haphazardly or based solely on personal relationships or preferences.
3. Negotiate to Get Best Deals
In almost every purchasing scenario, there are invariably opportunities to reduce the price. Or, if the price is non-negotiable, you might be able to get more favorable payment terms or, perhaps, free delivery.
So, part of your standard purchasing procedure should be to obtain several quotes for every significant purchase and negotiate with suppliers. And it would be best to periodically review your approved vendors to ensure that you are still getting the best deal.
4. Implement Purchase Ordering
To ensure that purchasing controls are adhered to, you will need to have an audit trail. In a small business, that audit trail might consist of paper purchase requisitions and purchase orders. Or a more extensive organization might implement an electronic, workflow-based procurement system.
Implementing a purchase ordering system might seem like overkill. However, purchase orders will prevent any misunderstandings with vendors. And the paper or electronic audit trail will ensure that employees follow the prescribed purchasing system.
5. Add Budget Responsibility to Job Descriptions
Those authorized to make purchasing decisions must be held accountable for their buying decisions. Indeed, without accountability, your purchasing control documentation could wind up gathering dust on a shelf. So, anyone to whom you delegate purchasing decisions should have that responsibility defined as a part of the job description. And it will also help to add budgetary control to your performance criteria for employees responsible for buying from vendors.
6. Manage Invoice Approval and Payments
You will also need a system for accounts payable invoice approval and payments. For example, someone will need to match vendor invoices to purchase orders. And invoices will require the appropriate sign-off before payment. Then, you will need to manage the timely payment of suppliers.
Even a successful business is at the mercy of cash flow. So, it may not always be possible to pay vendors in strict accordance with their terms. When that happens, it can be helpful to implement a vendor classification system to flag the business-critical accounts payable for priority payment.
Related Article: How to Prioritize Who Gets Paid When Cash Flow is Tight
7. Be Aware of Potential for Fraud
Implementing AP control procedures will also help to protect you against fraud. And fraud can be targeted at a business from the inside and external sources. Employees could order products for personal use, for example. And scammers might send you invoices for products or services you have not used.
So, it is best not to allow the management of payables to lapse once introduced. And ask questions if a vendor invoice does not ring true. Fraud does occur, but it won’t slip through the net if you stay on the ball.
8. Build Relationships with Key Suppliers
Building relationships with key vendors will set you on the way to getting better deals. And your suppliers will likely have contacts in your industry that might come in useful. So, the businesses you buy from should be included in your networking efforts.
However, staying close to vendors can become challenging when the business grows. So, it will help if you delegate managing vendor relationships to relevant managers within your company. And, of course, keeping critical suppliers sweet with timely payments will also help, which comes back to the previously mentioned point about categorizing suppliers.
9. Document AP Processes
Documenting business processes can seem like a time-consuming and unnecessary task. However, having written AP procedures will ensure that purchasing and vendor payments are well-managed. And good documentation will make coping with staff absences much less challenging. So, it is best not to rely on verbal instructions. Instead, create formal written procedures for accounts payable and other business processes.
10. Use Technology to Streamline Accounts Payable Processing
As a business grows, so the volume of accounts payable invoices grows, too. And, before you know it, you have employees dedicated to purchasing processing accounts payable paperwork. But, if you implement the right technology, you can streamline accounts payable processing and reduce the associated costs. For example, purchase requisitioning, approvals, and purchase orders can be automated with workflow systems. Switching to electronic payments will eliminate the need for checks and paper remittance advice. And you can ask the vendors who send you lots of invoices if they can change to EDI (electronic data interchange) invoicing.
The Bottom Line
The crucial point to take away from the above is that it would be a mistake not to manage your payables. Indeed, if you don’t have accounts payable procedures and controls, it will cost you money. So, it is best to ensure that all purchases are properly approved, and payments are managed before the business grows and payables get out of control.
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Universal Funding is a nationwide invoice factoring solutions leader, supporting growth-focused businesses with scalable factoring solutions. With its invoice factoring, payroll funding, and purchase order financing services, Universal Funding provides clients with the working capital needed to grow and support their businesses without taking on new debt. Ranked as one of the nation’s top invoice factoring companies, Universal Funding provides cash flow financing for businesses all across the United States.
