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Working Capital and Starting the Clock for Vendor Payments

Shared Services organizations can, and should, play a critical role in managing and maximizing working capital. While collaborating with Procurement on vendor terms and Treasury on cash management is a common practice, one obvious solution is often overlooked is the manner in which the invoice due date is calculated.

Recently, Peeriosity’s iPollingTM functionality was used to perform custom research in the Accounts Payable (P2P) research area to ask a very simple question, “What date is used as the basis to calculate the invoice due date at your company”?  It’s interesting how a “best practice” isn’t always the one the majority of companies are following, even when the issue in question isn’t all that complicated.  While the results weren’t particularly shocking – 73% use the invoice date and 23% using either the invoice receipt date, the goods receipt date or some combination of methods – once you read through the comments it quickly becomes obvious that the most popular answer is not likely to be the right answer for many companies.

Here are the details:

While the vast majority of the companies participating in the poll responded that they “follow the traditional approach of using the invoice date to calculate the due date”, almost every company which took a different approach added a comment to provide additional insight to their response.  Here are some of the comments:

  • With ERS purchase orders, the date of material receipt is used in the calculation of net terms. For non-ERS, non-PO activity, the date of invoice receipt is used in the terms calculation.
  • For the large majority, we use the date the invoice is received in AP to start the payment terms clock. There are some exceptions for paper invoices where we use the date on the invoice, which could lead to a lost discount or late payment. For paperless invoices (PDF, EDI, XML, Web), the invoice receipt date almost always matches the invoice date. For ERS-Self Billing, the day the settlement is run (usually weekly) starts the pay term clock.
  • We use the invoice receipt date or the goods receipt date, whichever one comes later. Our system starts the baseline date at the later of two receipt dates.
  • ERS invoices default to goods receipt date.
  • We use invoice scan date as base date to calculate due date. Earlier, we used invoice date. Due to this change, there was a bit of unrest with suppliers in the initial days of change.
  • Our company policy spelled out in the contracts, POs and our supplier portal is baseline date, or the date the invoice is received. Obviously, for a global company, there are legal requirements in certain countries where the invoice date is mandated, so compliance is required.
  • We made a global change from using the invoice date to the invoice receipt date in January 2015, which is consistent with the verbiage in our contracts; however, we are reverting back to invoice date for our European entities due to statutory requirements. When we have an issue arise and an invoice is already past due when we receive it, we make a one-time exception and encourage the vendor to register on our portal so they can submit invoices electronically and manage their account/invoices proactively. We also take that opportunity to encourage them to take advantage of early payments so we can obtain a discount through our dynamic discounting program.
  • Our POs and T&Cs state terms begin upon receipt of a valid invoice, but, to date, we have only utilized invoice date as the basis for terms.
  • In the U.S,. the common baseline date for payment is invoice date if an invoice is required. For vendors being paid based on receipt, the receipt date is the baseline date. In our Europe and AMENA regions there are some instances where the baseline date is the invoice receipt date. Past due invoices will pay in the next cycle.
  • We currently use the invoice date, but are seriously considering using the receipt date for all electronically submitted invoices in the future.

One of the comments pointedly identified the core issue with using the traditional approach:

  • Use of invoice date allows suppliers to manipulate the time frame in which they are paid. What would prevent a vendor from backdating their invoice by 30 days as a means of accelerating their payment by 30 days? For this reason, our preferred payment terms are always based off of the invoice-received date.

If this is true, how did the use of invoice date become so popular?  Historically, invoice date was the only information that was easily available.  In the predominantly paper-based processes of twenty years ago, with Accounts Payable activities often performed by a small number of processors who were based at each physical plant or office location, a keep-it-simple approach was the most practical solution.   However, with the move to automated processes and centralized processing centers, most companies would be well advised to evaluate and, in many cases, change their policy.

How does your company compute the invoice due date, and are you maximizing cash flow?

Who are your peers and how are you collaborating with them?

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 “iPollingTM” is available exclusively to Peeriosity member company employees, with consultants or vendors prohibited from participating or accessing content. Members have full visibility to all respondents and their comments. Using Peeriosity’s integrated e-mail system, Peer MailTM, members can easily communicate at any time with others who participate in iPolling.

Peeriosity members are invited to log into www.peeriosity.com to join the discussion and connect with Peers.   Membership is for practitioners only, with no consultants or vendors permitted.  To learn more about Peeriosity, click here.

 

 



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