Zen and the Art of Payment Cycle Maintenance

Recently, I was having a chat with the founder of a startup I’m advising. It’s a newish startup, with a tiny, overworked team. She and the co-founder are going a bit bonkers with accounts payable.  They are having problems keeping track of invoices. Stuff falls through the cracks, resulting in pissy emails from suppliers. Other items don’t, but then they are both stressed and on edge trying to keep track of everything and make sure everyone gets paid on time. Of course, everyone has different payment terms and due dates. Sometimes they go to pay and realize they don’t have enough of one currency or another, and have to scramble to convert money.  In short, instead of their key business objectives being front and foremost in their thoughts, administrative busywork is taking up valuable real estate.

Perhaps this sounds familiar to some of you?

Never fear!  You are a few simple steps away from whipping your payment process into shape.

Let’s start with the big picture.

Your key goals in managing accounts payable are as follows:

1. Suppliers get paid, the right amount, and on time. This is key for maintaining good relationships with your service providers.
2. Payments are only made for goods and services received. If you didn’t receive the goods or services, didn’t get the right quantity or quality or there is some other dispute…you don’t pay. It’s easier to get a discount than a refund.
3. Payments are made with your cash needs in mind. If you have 60 day payment terms, you are using those 60 day payment terms.  Of course, contracts should also be made with your cash needs in mind.
4. Your payment cycle should be set up with enough room for you to calmly and carefully review invoices, calmly and carefully investigate any odd items and calmly and carefully set up and issue the payments and so on. Notice the theme?  If you are calm and careful, you are less likely to make mistakes.
5. No one goes bonkers. 🙂

Sounds fab, yes?  Here’s how you actually do this

You need a process! If you, like my client, are also on the small end, it needs to be “tiny overworked team”- friendly. Here is what I suggested to them.

1. ONE PAYMENT RUN PER MONTH.
2. Set up an email alias or email account just for supplier invoices (e.g. “suppliers@bestnewstartupever.com”). Notify suppliers that all invoices must be sent to that address if they are to be paid. It will take a few months to get everyone on board.  Until then, if an invoice comes to you, just forward it to that address (and otherwise ignore it).
3. Set up a payables list that includes your recurring suppliers. This will need to be updated from time to time as suppliers come and go. You can find an example here .
4. Once a month, about 7-10 days before you want to issue payments, go through the supplier invoice inbox. Print out the invoices and archive each email so that your inbox is empty (and you don’t pay the same invoice again next month). I suggest tagging each email with the supplier name for easy retrieval/ reference. If you have anyone who does admin for you, this is a task that can be delegated.
5. Fill in the list with the invoices. Again-this can be delegated to an admin person.
6. Now you review the list, preferably over some nice, relaxing coffee. As appropriate, bring in your co-founder or other team member who is likely to be familiar with the suppliers and charges. Make them some coffee as well.  We are aiming for zen here.
   1. For each invoice, check the invoice detail. Did you receive the goods/ services? Is the amount charged correct? Are the rates correct? If a consultant is asking for expense reimbursements—is that in compliance with the contract? And so on.
   2. If someone else normally works with a supplier, ask them to review and sign off.
   3. Take a second to ask “did I already pay this invoice” and “was I already charged for this service”? (Yup—it happens). Check the prior month supplier list or prior month’s invoice (safely stashed in your suppliers@ email account) if there is doubt.
   4. If the invoice is approved, sign off on it and put it on the side to be paid. If the invoice is not approved, put it on the other side to be reviewed.
   5. Now take a look at your list. Are there any suppliers who should have sent an invoice but didn’t? If they are consultants, and you particularly like them 🙂 and/or they normally bill monthly, ping them to ask them to send their invoice so you can include them in this payment cycle.  Anyone else—can wait.  (You snooze, you lose).
   6. Investigate the problematic invoices. Anything that cannot be resolved should be put on the side. Most likely it will be sorted over the course of the month and you will pay it in the next payment run.  Add a note to the payment list to follow up.
   7. Finalize your list
   8. Prepare your payments.
   9. Double check the payments (ideally a second pair of eyes).
   10. Hit send.  🙂

Prevention is the better part of cure

Finally—a few words on contract negotiation.  Your goal is to have fair terms AND maximum flexibility.

1. Read the contracts before signing. It’s cheaper and less irritating than discovering that you are stuck in some horrible expensive, exclusive contract for 12 more months because it auto-renewed.
2. Never agree to auto-renewal, unless it is month-to-month with the right to cancel at any time with 30 days’ notice.
3. Same goes for exclusivity. If they want exclusivity, they will do such an amazing job that you simply won’t choose to use anyone else.
4. Consultants—make sure that you have the right to cancel at any time with 30 days’ notice.
5. Payments-
   1. A lot of online subscription or service providers will demand a year upfront. For the really big players (e.g. Apple and Microsoft), it’s generally take it or leave it. For most suppliers, you can often get quarterly or monthly terms.  Rule of thumb—if you buy the service via a human, you have someone to talk to.
   2. Suggested payment terms
      1. Independent consultants: 30 days. This is their salary
      2. Companies: 60 days
6. If you sign by today/ tomorrow/ whatever…we can give you a discount. Relax and take your time.  They aren’t going to turn their back on a sale because you took an extra 24 hours to read through the terms.

This is a very partial list, but your legal counsel can provide you with more guidance. And one of these days I’ll get around to writing a full-blown article on this.