A credit rating agency, such as Dun & Bradstreet or Experian, develops corporate credit rating scores based on a number of factors, such as the size of a business, how long it has been in business, liens, pending lawsuits, cash flow, the industry growth rate, and net worth. These factors are largely out of the control of the accountant. However, timely payment of payables is a key ratings factor, and this is largely within the accountant's control.
The payables staff probably already has set up all suppliers for payment within the time frame mutually agreed to by the business partners, such as 30 days. And yet, some of these payables will be reported to credit rating agencies by suppliers as arriving late. How can this happen?
First, consider the nature of a check payment - it may be printed on the specified due date, but it must still be signed, put in the mail, traverse the postal system, and be routed in a timely manner to the supplier's cash application staff, who must then apply it to outstanding receivables. In short, there are all kinds of places where delays can arise, all of which can negatively impact the reported date of cash receipt, and therefore the corporate credit rating. Here are some possible solutions:
- Use electronic payments. If a supplier accepts electronic payments, it is likely that payments are automatically applied to open receivables, which results in the fastest possible cash application, and therefore the best credit rating.
- Avoid deductions. A supplier's accounting staff frequently shunts aside payments that contain unauthorized deductions, or deductions that are not clearly specified. If so, the delay before being applied can be lengthy. To avoid this problem, document all deductions as thoroughly as possible, and preferably obtain a credit memo from the supplier, which can be referenced with the payment.
- Verify recipient address. Let's face it, the postal system actually works very well. If checks are repeatedly "lost in the mail," it probably means that there's a problem with the delivery address.
- Investigate supplier open payables statements. A supplier statement may arrive that shows open payables for which your records show payments that were made some time ago. If so, this is a massive clue that there is a delay somewhere between the check printing and cash application stages. Assign a staff person to investigate where the process was interrupted, and change the system to reduce the incidence of the issue in the future.
- Investigate the customer codes on supplier invoices. If a supplier has a continuing problem with applying cash against your invoice, it's entirely possible that the supplier has set up more than one customer master record for your company, and is applying it to the wrong account. You can detect this by pulling the last few invoices from the supplier and checking to see if more than one customer code is being used. If so, request that the supplier de-activate all but one customer master record.