Pay the piper only what's due - managing bills at small businesses

Nation's Business, March, 1994 by Randy Myers

For Robert Fields, discovering that his company had paid the same software bills twice had the ironic twist of a banker short on cash at the checkout counter.

Fields is president of Fields & Associates, a Burlingame, Calif., firm that audits accounts-payable records for other companies and splits any recovered overpayments with them.

The fact that Fields encountered that very problem at his own 20-person firm simply highlights the message he and other accounting specialists have been preaching for years: Businesses small and large routinely overpay for at least some portion of the goods and services they purchase, not by shopping at the wrong place but by inadvertently paying more than the price they and their vendors have agreed upon.

The reasons can be as simple as misplacing a comma. But typically the catalyst is less obvious: A retailer fails to take an available trade discount, for example, or a manufacturer pays both an invoice and a billing statement for the same merchandise.

"It all boils down to communication problems," says Howard Schultz of Howard Schultz & Associates, a Dallas-based auditing firm that recovers in excess of $200 million a year for its clients. "Unless your company is so small that the same person who does the buying actually checks the goods in and then writes the check to pay for them, you're going to have a [communications] gap to bridge."

Specialists such as Fields and Schultz both agree that businesses of any size can identify likely sources of overpayment problems and the times when they're most likely to occur, and then take steps to correct or prevent them.

For example, "companies in the start-up mode and those in a growth mode are especially vulnerable, because much more attention is given to the marketing of the business, and the supporting staff plays catch-up," Schultz says.

Even companies too small to have a support staff aren't immune, though. George Berman launched Berman Associates, a public-relations firm, with his wife, Rochel, three years ago and established two local telephone accounts for his company--one at the fledging firm's Yonkers, N.Y., office and another at his home.

Amid the pressures of launching the business, Berman inadvertently paid bills for both phone lines against the home-based account, overpaying it by hundreds of dollars and ringing up a comparable past-due bill on the other account.

Berman was forced to fork over the back-due payment for the office account and whittle down his credits on the other over the next few months, tying up precious capital that could have been put to better use elsewhere.

Experts say businesses should be particularly vigilant when the employee who normally pays the bills is absent for an illness or vacation, or when accountspayable duties are turned over to a new person permanently.

Fields' own experience began with a cash-flow squeeze. In an effort to ride out the cash shortage, Fields & Associates instructed its accounting firm to withhold payment on several invoices for four weeks, but in the meantime the firm went ahead and approved those invoices for payment. The bills were paid as planned after the four-week interlude, but so too were duplicate invoices that had come into the office as the cash crunch was winding down.

As Fields' experience shows, knowing when to be wary of overpayment problems doesn't do much good if procedures aren't in place to prevent them. Here are steps that any small business can take to head off overpayment problems before they happen:

* Always use purchase orders to buy goods or services, and make sure the person who pays invoices compares the terms of the two documents.

* Comply with vendor specifications for purchase orders to avoid confusion.

This is especially important for retailers who want to take advantage of the sometimes overwhelming array of special discounts offered by vendors.

* Have one person pay all invoices.

* Pay bills only against invoices, not against follow-up statements. Too often, statements overlook payments that have been made but not credited, inflating the actual amount due the vendor.

* Pay photocopied or duplicate invoices when an original has been lost, but only after double-checking the status of the account. "Many small companies tend to avoid the rigors and discipline necessary to do things right," says Fields, who now makes a conscious effort to sign off on all bills personally.

To get the best results, Fields advises, persuade all of the pertinent players to go along with any new bill-paying procedures from the outset. "People hate having things shoved down their throat," he says.

In general, accountants say, small businesses that review their accounts-payable records shouldn't expect to uncover a windfall. But given that the money saved by not overpaying bills falls directly to the bottom line, any time spent tightening up accounts-payable procedures is likely to be time well spent.

Randy Myers is a free-lance writer in Dover, Pa.