PAYABLES MANAGEMENT
Accounts
Payable is the amount that the firm has to pay to its suppliers or vendors on
the account of goods and services received. It means that after giving orders
of goods and services by the firm, it should record a liability in its books of
accounts on the basis of the invoice amount before making the payment. Accounts
Payable Management refer to the practices, procedures, and policies used by a
company with respect to managing trade credit purchases. These tasks involve:
· Seeking
trade credit lines
· Acquiring
favorable terms of purchase
· Managing
the timing and flow of purchase
Purchasing
inventory, raw materials, and other goods on trade credit allows a company to
defer its cash outlays, while accessing resources immediately. A firm that
employs best practices with respect to payables management can reap the
benefits of stable operating cash flows and place it in a good liquidity
position with respect to its competitors. Firms seeking trade credit must
demonstrate that they meet certain criteria with respect to their
creditworthiness and financial condition. The purchase and credit terms obtained
will depend on the firm’s risk assessment. After entering into purchase
agreement with a supplier, the firm has the responsibility of fulfilling its
payment obligations
Evaluating
the Performance of Payables Management:
Payables
Turnover Ratio: This ratio measures the average number of
times a firm pays its suppliers in a particular period. The higher is the
ratio, the faster is the payment.
Days in
Payables Outstanding: This term measures the average
length of time it takes a firm to pay for its short term purchases in a period;
the DPO can be used to determine an optimal timing of payments for its
payables.
Cash
conversion Cycle: A low CCC is highly desirable which
can be obtained by lengthening in terms of purchases.
Net Working
Capital: A decreasing pattern in Net Working Capital can
be attributed to increasing levels of payables which serve as a warning sign of
excessive short term credit. A negative NWC is a red flag for a lack of
liquidity or potential insolvency.
Importance
of Payables Management:
1.
It primarily takes charge of
paying the firms’ bills on a timely basis thus maintaining a strong credit and
long-term relationship with suppliers
2.
On prompt payment of payables,
uninterrupted flow of supplies and services for systematic flow of process will
be ensured
3. This ensures that there are no overdue charges, penalty or late fees to be paid for the dues
FACTORING
Factoring is defined as a
continuing agreement between a financial institution (Factor) and the business
concern selling goods or services to track customers on Open account basis,
whereby the factor purchases the clients’ book debts, either with or without recourse
to the client and in relation thereto controls the credit extended to the
customers and administers the sales ledger.
A factor provided various services
such as debt administration, credit protection and factor financing. These
services could be done in a variety of systems such as single factor system
– where both the exporter and importer have a common factor to speed up the
process and reduce cost; two factor system – where two different factors
are used to render services independently; direct export factoring – factoring
company based on exporters country has been engaged to render services; direct
import factoring - factoring company based on importers country has been
engaged to render services.
Mechanism
of Factoring: The basic need is to have a factoring agreement
between the factor and client. Besides these two parties, the purchaser, who
has purchased the goods from the client, is also a party to the factoring deal.
The steps
involved in deal of factoring involved in import-export mechanism is as follows:
1.
The client approaches the factor
with all details of business, debtors and orders in hand, which he intends to
get factored.
2.
The factor (export factor) contacts his
counterpart in the country of buyer/importer (known as import factor), to
assess the creditworthiness of the buyer, to set limits on him.
3.
The export factor then signs an
agreement with his client, detailing terms of services, along with indicative limits
on the buyers/importers.
4.
The client submits two copies of
the invoices drawn on the buyer, and get finance up to the extent approved.
5.
The export factor sends one copy
of the invoice to his counterpart, in the country of the importer, for
collection of debt, when due.
6.
The import factor then collects
the debt, on due date and remits proceeds to the export factor, enabling him to
adjust his outstanding. The balance amount is released to the exporter, after
adjusting for interest, charges, etc.
7.
In case of non-payment by the
debtors on due date, the import factor settles the dues, and then enters in to
the role of the export factor for recovery of dues from the debtor.
Advantages
of factoring:
· Immediate
financing up to 75-80% of the invoice value
· No
need for LC, thus saving costs for the importer
· Credit
check on importers/ buyers
· Sales
ledger maintenance
· Credit
protection on all approved debtor limits
· Advisory
services for new areas, countries
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