Accounts Payable vs. Credit Management: Two Sides Of The Same Coin.

Late payments seem to be among the top three pain points in any business, regardless of sector or size. Accounts Payable (AP) and Credit Management (CM) play crucial roles in this arena, working on opposite sides of the same coin to ensure the smooth flow of payments within the business ecosystem.

As a seasoned credit controller and manager, I have seen the frustration between AP and CM. However, is this frustration placed at the right door, or should we understand more about the needs and requirements both teams need to manage the flow of expectations?

AP teams often face criticism as they process invoices and make payments. However, they are only one part of the equation. On the other hand, Credit Management is equally essential, focusing on collecting payments and managing outstanding invoices. Understanding the symbiotic relationship between these two functions is vital for the financial health of any business.

Drawing from over 30 years in credit management, I have a few insights about working with AP teams and how a better relationship should be forged. Understanding the needs of both parties is key to acquiring the results they are both striving for. So, let’s break down each side or the roles.

The Role of Accounts Payable

AP teams are responsible for processing invoices and ensuring suppliers are paid on time. Unfortunately, payment delays often stem from issues beyond their control, such as disputes over invoices, missing purchase orders, or delays in the approval process. However, AP teams must safeguard the business by also dealing with KYC and fraud prevention, which can sometimes delay payments further. With the increased threat of fraud, this is a priority and can cause delays in payment and friction with suppliers.

I have seen first-hand the frustration in getting invoices approved and the delay in credit control from their point of view. However, it also needs to be remembered that there are frustrations and delays credit control is often faced with, and so is the accounts payable person on the other end of the phone. We all have targets and deadlines, and working against each other makes life a lot harder and can shatter relationships. As mentioned by Rachael, we are both pressured by suppliers and internal stakeholders to hit targets and deadlines.

Working within various-sized businesses, the demand for prompter payment is more critical for smaller and micro businesses than for large or corporate businesses. Large businesses have been known to have strict rules that they will not bend. In my experience, being a supplier to a large corporation seems to be a lot harder from the outset than that of a medium or smaller SME. Some use high-tech portals that insist ALL suppliers use; they demand they set the rules of payment terms, which is wholly unacceptable, and insistence of PO for all invoices, yet delays in obtaining these can be great, along with the pressure to do the work or supply the products can be overwhelming to an SME. If the company is a micro business and does not have the capability to adhere to such requirements, then alternatives should be discussed and arranged, remove further delays of payment, and have a better working relationship.

The Role of Credit Management

Conversely, Credit Management ensures that customers pay their invoices on time. This involves assessing creditworthiness, setting credit limits, and managing collections. Like AP, CM professionals face challenges, from dealing with difficult customers to managing internal pressures to maintain cash flow.

CM teams must balance maintaining good customer relationships with collecting payments promptly. They often must navigate complex situations where customers face financial difficulties, requiring negotiation skills and patience.

But just like their AP counterpart, the role is more than just collecting payment.

Assessing creditworthiness is one of the primary responsibilities, especially when initiating engagement with a new client and requesting a credit extension. This results in setting credit limits, and if the client has not paid their account, this can also delay the supply of work, which can cause irritation for the client, their AP, and the CM team.

Just like AP, CM must implement CM policies and ensure that they are adhered to throughout the business. Again, this can cause issues with payments if an internal stakeholder in the business is not adhering to the policy, and many queries are caused by false promises, pricing differences, and incorrect billing, to name a few. Again, like AP, CM is responsible for conducting due diligence to prevent fraudulent transactions. CM is responsible for acting swiftly to halt fraud, conducting internal investigations, and educating staff to prevent future occurrences.

I have 2 examples of saving thousands for stalling on a fraudulent activity.

Working as a credit manager for a large company, an order for over £200K was received for tools and machinery to be delivered in Scotland. The salesperson was elated by the prospect of a large sale two days before month end. The order was requested to be delivered under ‘next day delivery.’ The stock was there to facilitate the order, and all that needed to be done was approval by credit management for the order to be released on credit.

So, what were the facts?

Kent business selling £200K worth of tools to be delivered to Scotland.

• The customer business was a new company with no credit score

• The director had 4 dissolved companies under his belt

• Why buy tools from Kent when they are in Scotland

• Tools are easy to resell.

• The Company address looked odd on Google Maps (garage) and was also C/O

• My gut feeling was a fraud!

Yes, the sales team were gutted when I refused release. I also said that they could pay on order if this was a bona fide business. Funnily enough, they didn’t want to buy goods and save a loss of over £200K in sales.

Our client was doing a check on a business that wanted to supply them with a large contract. The customer was a haulage company and wanted our client to do recovery and tyre repairs with a credit account of 60 days with a potential revenue of £300K.

As a small business, being offered such an opportunity felt like a success; however, after reviewing the proposal and the business with our client, they soon realised this great opportunity could have had a large negative impact on their company if they had engaged in the contract.

The information we reviewed was from the company’s house. The director's occupation for a haulage company was a hairdresser. Her partner was suspended from the directorship and had 2 previous transport businesses fall into insolvency. The loss of revenue for this small, long-established business would have destroyed the company had the due diligence of KYC not been done properly.

The Symbiotic Relationship

Both AP and CM are essential for maintaining a healthy cash flow. AP ensures outgoing payments are managed effectively, while CM ensures incoming payments are collected on time. When these two functions work harmoniously, businesses can manage their finances more efficiently, avoiding cash flow crises.

Effective communication between AP and CM is crucial. For example, if AP knows the cash flow situation, they can better prioritise payments. Similarly, if CM understands the payment processes and challenges faced by AP, they can set more realistic payment terms and expectations with customers.

A Case for Collaboration in Credit Management

Credit management can genuinely assist customers facing cash flow issues. After all, if you have qualified credit controllers and a competent credit manager, along with a good relationship with your customer's accounts payable department, the skills in debt recovery and cash flow management can help clients get back on track with the guidance of your skilled credit management team. The primary purpose of each department is to collect payments, make payments, and maintain healthy cash flow across all businesses.

Most companies do not want to see a valuable customer or supplier go bust. Sometimes, a little guidance can secure a better relationship, helping to resolve cash flow issues and forming a stronger bond.

Conclusion

Accounts Payable and Credit Management professionals must be resilient, patient, and collaborative. Though their roles are different, they are interdependent and vital for a business's financial stability.

We must collectively take responsibility for improving payment practices. While initiatives like the Prompt Payment Code are commendable, further education, understanding, and support for smaller businesses are essential. Larger corporations, government agencies, and other stakeholders must collaborate to provide the necessary resources and guidance.

Improving department communication, investing in training for both AP and CM teams, and implementing better systems can help ensure smoother payment processes. Fostering a cooperative environment where all parties understand each other’s challenges will lead to more efficient and timely payment processes, benefiting everyone involved.

Tracey Westell FCICM

Another perspective...

Lessons from an AP Manager

There has been so much discussion (as there should be) around late payments to small businesses and how to improve the overall cash flow for these businesses.

Accounts Payable teams are always given a hard time, as they are the ones that process the invoices and make the payments.

I wanted to give my view, my experiences working in AP for nearly 30 years, and the difficulties, decisions and struggles we face.

Unfortunately, it is usually an issue not created by Accounts Payable or is beyond their control, that has caused the invoice not to be paid.

Personally, I have worked in many different-sized businesses over my career, from massive corporates to small businesses with a couple of employees and many in between. I have also helped Friends and family who have owned their own businesses and been self-employed, so I fully understand the struggles and frustrations.

Over the years, I have been verbally abused, physically threatened, shouted at, screamed at and called various not-very-nice names on many occasions; also, I have dealt with many polite and understanding business owners as well.

Never have I worked with an Account Payable person or team that doesn’t want to pay their suppliers on time. In fact, many will bend over backwards and go against their own company's processes and procedures to ensure suppliers get paid.

Larger businesses have more hoops to jump through regarding segregation of duties, conflicts of interest, the HMRC process (VAT, Reverse Charge VAT, and Construction Industry System), Internal/external audit, and bank and fraud regulations and processes.

We also have internal struggles. When someone places an order with a business, have they followed the correct process? Have they raised a purchase order? Once the order has been placed and the goods and services have been delivered, many see it as they have done their bit; everything else is for AP to sort.

Sometimes, APs don’t even know that an order has been placed until the invoice is chased for payment.

In some businesses I have worked in, mainly smaller to medium-sized, I have been given a figure that I can spend to pay the suppliers. It was then down to me to pick which suppliers got paid. Once the money was spent, there would be no more until the next month.

I know some suppliers require 100 % upfront payment; others just do the work and hope for the best.

Businesses manage their cash flow in various ways, and the AP team is usually the last one to know.

In one business I worked in, after only a few weeks, we were made aware the administrators were imminent. I paid all the employees and all the suppliers we could, emptying the bank account the day before the administrators arrived. It was just before Christmas, giving a very small amount of satisfaction that at least all the suppliers had got something before Christmas. Still, unfortunately, several suppliers had put a lot of their own cash flow into this 100-year-old failing business, and they, too, could no longer survive.

Accounts Payable teams have to be a certain type of person, thick-skinned and broad-shouldered, and for many years, they have been forgotten teams.

I completely understand the frustrations of the supplier, no matter how large or small the business, and I never take their frustration personally. Sometimes, the decisions an AP Manager has to make are not the decisions we want to make.

This is an issue that we all need to accept responsibility for; while the prompt payment code is a brilliant idea, and I fully support the thought process behind it, I believe education, more understanding and support are required for smaller businesses, whether the larger corporate business, the government or other agencies deliver that. We all need to work together.

Rachael Long APAM