The conventional wisdom in AR is that customer AP departments don’t really want to make a payment on-time. Sure there are situations where some customers have cash flow problems and their AP departments try to stretch suppliers to conserve cash. However, in general AP departments want to pay suppliers, and pay them on-time.
Here are some reasons that AP departments want to pay you on-time.
When an AP department is not paying vendors on-time it raises red flags during an audit, and makes an audit, particularly at the end of a fiscal period, more difficult.
The red flags call into question the adequacy and compliance with controls and procedures, increase concerns of AP fraud, and make year-end testing and verification more difficult and time consuming.
Stretching AP can also create problems with key financial ratios, and compliance with credit agreement covenants.
The last thing an AP department manager wants is to be written up for control weaknesses, or be the cause of delays or problems with the year-end audit.
Good vendor relationships are very important. Vendors are key business partners. Losing a key vendor can be as big a loss to your company as losing an important employee or customer. Replacing a key vendor can be difficult, time consuming and costly.
It is unlikely that a customer AP department would risk jeopardizing its company’s good standing and relationship with a key vendor.
Most companies are loathe to do anything that will jeopardize their payment history and credit rating. It takes a long time to build a good payment history, and even longer to restore it if it is tarnished. Under normal circumstances companies are not going to stretch vendors and risk the consequences.
A lower credit rating can impact your company’s ability to borrow, the cost of borrowing, and compliance with existing credit agreements. Customers are not going to risk a credit downgrade in this difficult economic environment.
Budgeting and Forecasting
Delaying payments to vendors makes it difficult to accurately budget and forecast cash flow. It muddies historical AP data making it unreliable for projections, requiring manual adjustments to account for the impacts on assumptions in budgeting and forecasting models. Accurate budgeting and forecasting of cash flow are essential in the new normal.
Customer AP departments do want to pay you on-time. They want to avoid audit problems, maintain good vendor relationships, protect credit ratings and budget and forecast cash flow accurately. Automation makes this possible. It results in benefits that increase profits, cash flow and shareholder value.
Lockstep Collect, a leader in cloud-based credit and collection platforms, can help you collect cash in 4 ways:
- Cloud-based solutions
- Automated customer communications
- Customer self-service
- Collections Activity Management
Lockstep Collect is an experienced software partner that can help you maximize your collections and cash flow in the new normal.
If you would like to learn more about how you can benefit from automated credit and collection solutions, please contact Lockstep Collect at www.lockstep.io.