Vendor Payment Terms and the 6 Degrees of Kevin Bacon (Part 1)

Vendor Payment Terms and the 6 Degrees of Kevin Bacon (Part 1)

 *This is the second in a 2-part series first published on Spend Matters. Part 1 looked at the late payment ripple effect and the need to think strategically about vendor payment terms. Read part 1 of the series here.

Flexibility through automation

The more automation a company adds to its process, the easier it is to manage payment terms. The lynchpin is how quickly a company can get invoices paid – and in this regard, many are still posting some pretty ugly numbers. If your accounts payable (AP) process takes 28 days just to get the invoice to the approver, and then you have to cut and mail checks, you simply don’t have the flexibility you need to be strategic.

The first step is to reduce days payable outstanding (DPO) with electronic invoicing and automated payments so you actually have the capability to pay faster. Then you can decide when it makes sense to do so.

Historically, companies have made payment terms one-size-fits-all. Or, they will sometimes have two tiers, maybe paying their strategic vendors in 30 days and everybody else in 45. We don’t need to keep doing it that way. Are there vendors you can work something else out with? If you can get a discount, why not pay them faster? If you can extend them out, what is the impact to your organization, and to the relationship?

Money and communication

The only way to manage this at scale is with automation. When you add a new vendor, you can embed their payment terms into the system so it reminds you, “Hey this is a shorter-term vendor and this is due now,” versus the generic 45 days. Systems can take on that capability and provide the visibility needed to manage payables strategically.

And visibility is huge. The only thing more important in payments than money is communication. A company can usually wait for its money as long as it knows when it’s going to get it. It can plan, budget and forecast. A company can effectively manage its borrowing and its own vendors’ expectations.

It’s one thing to have a late payment in a paper-based system with no visibility. Then the vendor has to make a phone call, and someone in AP has to go track down the invoice and see where it is in the payment process.

With automation and accounting tools such as self-serve vendor portals, everyone can see that payment is awaiting final approval. The approver is on vacation until Tuesday. Payment will go out on Wednesday and you'll get your ACH by Friday. This benefits both buyers and vendors and goes a long way toward keeping everyone happy.

Automated invoicing, electronic payments, and vendor portals are where the industry is headed. It’s time to revisit vendor payment terms and look at them in this new light. When terms are too long or payments are late and people don’t live up to their end of the bargain, it affects more than just one relationship. It affects every other relationship you've got.

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