By David Bloom, co-founder and CEO, fd unlimited
Last month we highlighted a number of simple effective steps you can implement to control to improve your working capital on the sales cycle. This month we look at effective steps on the purchase cycle. Combine the two and you could make significant improvements to keeping cash in your business longer, working harder for you. As with the sales cycle tips, we will look at issues through the filter of process you can control and process you can’t.
Raise Purchase Orders (“PO’s”) but be sensible: By the time you receive a purchase invoice, you are normally committed to paying for the goods or service ordered. Even if there’s been a problem with the supply, you will need to pay once the issue is rectified. The only sure-fire way to ensure you only spend what you have budgeted for is to have the employee looking to commit the company’s funds to raise a Purchase Order which needs approval by the budget holder. But be sensible — there is no point insisting on PO’s for regular monthly spend such as rent and there’s no point insisting on PO’s for paperclips. Your Head of Finance should use judgement to ensure the right balance of internal control and not burdening the business down in red tape. There are some simple excel tracking tools to ensure PO’s get deducted from a budget to ensure Department Heads never ‘knowingly’ overspend.
Purchase Invoices should come straight to Accounts: In order to provide senior management with an accurate picture of financial performance each month, it helps to ensure purchase invoices get to accounts for processing as quickly as possible. If there is a significant delay — it can be months sometimes! — then your Head of Finance will be accruing costs each month, i.e. guessing what s/he thinks costs have been. For the fixed items like rent, this will be accurate, but if you have no PO system and Martha in Marketing and Steve in Sales have spent £50k between them and nobody tells accounts, or your Head of Finance has no controls in place to ask, you will be understating your performance for the month by £50k. Ensure invoices come straight to Accounts Payable before they are approved. At least they can be put on the system and the numbers will be more accurate for the Board at month end.
Purchase Invoices should be approved: On a weekly basis at least, Purchase Invoices should be approved by the budget holders. The Purchase Ledger clerk or Bookkeeper should proactively seek a signature from the person who committed the spend to ensure the goods and service were delivered or provided in accordance with the terms. Invoices should be matched to PO’s if you have a PO system in place.
Do one payment run a month and limit the amount of ad hoc processing: As you build up a number of suppliers and employees who submit expense claims it becomes increasingly important to control the frequency of payments made. Significant time can be saved for the finance team, cheque signatories and the like if you train your team and suppliers that invoices only get paid once a month. When it’s ad hoc, finance gets interrupted constantly with payment demands from suppliers and employees alike. By telling them invoices get paid once a month as do expense claims (sometimes twice if needed) and providing dates and process, the volume of calls and chasing drops off almost at once. The added advantage of pushing out the payment run as late as possible in the month is the working capital efficiency gained of keeping funds in the business longer.
This article covers the tip of the iceberg. If you need help and support in managing your purchase cycle from raising a Purchase Order through to cash allocation through to documenting workflow please get in touch at email@example.com or visit us at www.fdunlimited.com
fd unlimited provides high calibre and cost effective part-time, interim and full-time Finance Directors, Financial Controllers, Finance Managers, Board Advisors and Back-office Services to dynamic companies with aspirations for growth. Our network allows us to match your need with the right resource, in a matter of hours if needed. Find us at www.fdunlimited.com
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