From the Founder – The importance of a well-maintained purchase ledger

25/04/2019 Paul Knappett

When I speak to business owners about outsourcing their financial processes, it usually starts with sales invoicing, chasing in cash and bank processing. Very few start with suppliers and making payments, which I can understand why, after all “cash is king”! But when it comes to profitability and reliable financial reporting, the cash you spend is equally as important as the cash you receive. These are some of the issues I’ve come across recently and the impact they will have on any business.

Not calculating a true profit figure

Not reconciling your supplier ledgers on a monthly basis can cause many issues. You could be overstating or understating your profit by not correctly accounting for the purchases made from your suppliers. This can have serious consequences on your business if you are using this information to make key business decisions.

One of the most frequent ways of overstating costs, is when the purchase invoice is processed, and the corresponding payment is then posted directly to the Profit and Loss account. You are therefore double counting the cost, and possibly double counting the VAT. It’s so important to ensure all payments are correctly allocated and if these suppler ledgers are reconciled monthly, nothing should go astray.

Over paying suppliers

If you are paying suppliers using their statements and not reconciling this back to your accounting system, overpayments can easily be made. You’re relying on their accounting system to be correct and could end up paying an invoice twice if their allocation hasn’t been completed correctly.

Not paying suppliers on time

As I mentioned at the start, cash is king, but ultimately the company still needs to remain profitable. From my experience, delaying payment to suppliers will ultimately cost you in the long run. When negotiating prices, it becomes a lot harder to obtain a better price if you have paid them late consecutively for the last 12 months.

Suppliers like businesses that pay correctly and on time, and you’ll find that by giving them the reassurance that their account will be looked after and settled when due, negotiating on price will become slightly easier.

I know maintaining a purchase ledger isn’t the most glamorous part of running a business, but I believe it is a key part of every company.

If you would like to find out more about outsourcing your purchase ledger process, either complete the feedback form below or call us on 01926 671870.

 

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