Accounts payable departments often get beat up for not performing and upsetting the companys’s suppliers. Informita’s recent newsletter contained an important example of how you need to understand exactly what your A/P (and youir A/R as well) statistics mean. One Informita client was proud that their A/P department made 85% of their payments on time, but ‘delving deeper’ Informita found that “any-thing that was paid from three days before due date to three days after due date was considered to be on time.” Informita call this a defensive statistic.
Early payment cost
Informita found that in their client nearly 30% of the payments were actually being made early because of the A/R department’s definition of being paid on time. Once this was discovered, internal procedures were changed, capturing millions in additional cashflow.
Measuring incorrectly can and does cost millions.
Reasons for late payment
Informita point out that basically there are four reasons for late payment:
- a disputed invoice
- invoice arrived late
- the invoice authorisation process is slow
- someone in finance or treasury is deliberately delaying payments.
For the A/P department: in the first three reasons the A/P department need to clean up their systems and processes. On the fourth reason, today, when SMEs are getting more and more government protection, delaying payment is both unscrupulous and can be dangerous for the company’s reputation with their suppliers and with their government.
CTMfile take: Peter Drucker, the management guru, believed in measuring results and performance and that it is crucial to a department’s effectiveness. But he also viewed results in a wider, more nuanced way. ‘In Management: Tasks, Responsibilities, Practices’, Drucker wrote: “Work implies not only that somebody is supposed to do the job, but also accountability, a deadline and, finally, the measurement of results —that is, feedback from results on the work and on the planning process itself.” Informita’s client’s A/P department clearly didn’t understand the wider context of their role and responsibilities.
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