Lara Mulawka

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How to avoid problems when paying vendors

Businesses of all sizes need to pay their bills on a regular basis to maintain a good reputation in the marketplace and stay afloat. A small business needs to be savvy in paying bills, even with a computerized system. You don’t want to pay too slow or too fast — the idea is to pay right.

The process of paying bills, also known as accounts payable, usually involves a computerized system. The first step is to enter bill information and then pay bills by printing checks and signing them. On the surface, this is a straightforward process, until you have an issue. Maybe it’s a vendor refusing to sell supplies, or a payment done for something never received, but discovered after the fact. Yikes.

Here are some issues and tips to consider before you run into problems:

  1. Paying vendors twice

    The issue of paying a bill twice is quite common, using a manual or a computerized system like QuickBooks. Sometimes names may be duplicated with minor differences, such as “Ace Supplies” and “Aces Supplies.” So, it’s easy to make a payment using one name and then make another using the other name by mistake.

    Solution: To avoid this issue, a company can set up its system to flash an error message if a duplicate invoice number is entered. Another way to prevent doubling up payments is for management to review a master vendor list regularly for duplicate entries like a firm with different names but the same address.

    Another common control mechanism is a low-tech filing system where invoices are stamped with “Paid” so that the same invoice cannot be mistakenly paid again. Businesses could also have a procedure to pay only on invoices and not statements. Invoices usually reflect individual sales, while statements summarize transactions.

  2. Paying vendors late

    Paying late can happen when bills are lost or misplaced.

    Solution: To avoid this issue, make sure bills are received by a specific person daily, who stamps them with the date received and saves them in one “To be paid” file. If this person leaves or goes on vacation, be sure you have a backup employee ready to step in to avoid delays. This is especially important when bills are received online and the original person no longer gets such information. The new employee or backup person should get all forwarded messages and bills. The bills are entered in the computerized system like QuickBooks at least once a week.

    Another way to control late payments is to review computerized aging reports that shows vendor names and how long they have been left unpaid. If a bill entered in the system is shown as unpaid for a while, double check on it to see reasons for that. And if you don’t see a monthly bill paid regularly, inquire about it.  Another report to be reviewed regularly is a payment report that shows payments made. If you know that a certain bill needs to paid, inquire why that is not showing up there.

    If paying late due to lack of funds, it’s a sign that a business is not collecting its own revenues on time and needs help with cash management.  Maybe the company can get a line of credit to avoid a temporary or seasonal lack of money.

  3. Paying for service or items not ordered or damaged

    Some businesses have the issue of paying bills a bit too fast, not waiting to find out if items or services were actually received. Maybe a firm received a shipment where some items were damaged, and the bill shouldn’t have been paid.

    Solution: Set up a procedure where all bills are paid only after they are approved, preferably by someone not involved in the actual payment process.

    Management should review “vendor change/add reports” to identify odd vendors. Unfortunately, employee fraud in this area is a possibility as the fraudster may create a fake vendor and bill, get it paid and deposit the funds in their own account. Knowing that someone is reviewing the reports regularly may prevent this problem.

    To avoid check fraud, such as adding more zeroes to an amount, you can set up a system, known as “Positive Pay,” with your bank where only vendors and amounts registered on a list are paid. If a check is presented but doesn’t match the list, it’s refused by the bank.

    Consider that bills received by a business may be part of an outside scam. The Federal Trade Commission urges businesses to train employees to consider scams that are real and cost small businesses a lot of money as fraudsters can create fake invoices hoping they are paid up with no questions.

  4. Paying online

    In the past, most bills were paid by checks and the person signing them could review backup documentation and make inquires before payment was made. However, the online environment has changed this process for many firms that now send payments online. It’s fast and convenient. But also there are risks using this service, such as creating fake vendors, paying more, paying less, etc.

    Solution: The way to handle these risks is basically for the bank to notify someone outside accounting of the transactions to double check on the payments before they’re scheduled. Having more than one person as part of a process is a typical internal control feature to avoid errors and misappropriations.

    Management should also check all cash accounts online regularly and let people know of this process, so that someone may think twice before committing fraud. Management can also find innocent errors and be able to correct them early.

There are quite a few risks when paying bills, and people working on this should be adequately trained, not just on the electronic program, but also on internal policies and procedures to avoid issues. Paying the bills the right way is not just for big businesses, small ones can do this as well.

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