Recently, in our July Metal Mania Newsletter, Bruce Margolin, Chief Operating Officer of Ace Steel Supply wrote an informative article, which can benefit your business. In case you missed it, I’ve included the article below in its entirety.
Purchasing and Supply Chain personnel most likely deal with the buying organization’s accounting department more frequently than any other internal department. As such, it is essential that these departments have a good relationship. While each department most certainly has its own responsibility, they also share joint responsibility for certain activities.
Only authorized purchasers should make purchases, and all purchases should be documented by way of a written Purchase Order. A Purchase Order (PO) is a written contract between buyer and seller and clearly spells out the terms of the commercial transaction. A proper PO will include agreed upon payment terms, respective company contact information, material specifications, quantities required, freight terms and delivery dates. Accounts payable should never pay any invoice submitted involving an undocumented purchase.
The accounts payable activity is responsible to see that invoices match the purchasing agreement. When an amount or terms do not match, the invoice needs to be questioned. Some companies allow accounts payable to contact the supplier to have a revision made and obtain a new invoice. Other companies have accounts payable turn over the invoices with discrepancies to the buyer for resolution. In any case, it is not good practice to pay an incorrect invoice.
Accounts payable should make sure that the purchase terms are abided by. Such terms include the length of time when payment is due, for example, Net 30, Net 60, etc. Some accounts payable operations take more time to pay than the supplier agreed to. Not abiding by the terms weakens any further negotiations between buyer and seller, which may result in the supplier charging more.
Payment discounts agreed upon or simply offered by the supplier can provide significant cost reductions. It is the responsibility of accounts payable to pay invoices with such discounts negotiated by the buyer, and it is financially feasible to do so. To understand the true benefit of a cash discount, use this formula for future business purposes.
For example, if the discount term is “1/10, net 45,” the customer gets a 1 percent discount if he pays within the discount period of 10 days; otherwise, the balance is due within the credit period of 45 days.
Compute the implied cost for not paying within the discount period and forgoing the cash discount. Divide the cash discount percentage by (100 percent minus the cash discount percentage) and express the result as a percentage. Continuing with the example, the cost, expressed as a percentage, is equal to 100 multiplied by (1 percent divided by (100 percent minus 1 percent)), or 1.01 percent.
Calculate the effective annual rate. Divide 365 by the difference between the credit and the discount periods, and then multiply that result by the implied cost. To conclude the example, the effective annual rate is equal to 1.01 percent multiplied by (365 divided by (45 minus 10)), or approximately 10.5 percent. It is best practice to negotiate payment discounts and take full advantage of the additional savings.
The accounts payable operation must keep supplier names and terms in strict confidence when talking with other employees or any suppliers’ personnel.
Many companies allow payment of invoices that show prices or amounts slightly incorrect. The allowed variation is usually only a few dollars, or a minor percent. The justification for paying the amounts is based on the cost involved in correcting an invoice. Each company should define their own threshold that would be considered acceptable.
In the end, if Purchasing, Supply Chain and Accounting work well together, the company benefits. At Ace Steel Supply we pride ourselves on being a viable solution for your supply chain needs. Let Ace Steel Supply be your supplier of choice. See how a collaborative relationship can deliver results above and beyond your expectations. Specializing in carbon, galvanized, stainless and aluminum materials.
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