Do You Pay Bills That You Shouldn't?

by Christine M. Searle, CIA, CRMA, Owner, Searle Business Solutions, LLC. 
You are a busy business owner or non-profit leader. Your organization purchases or contracts for the goods and services that are necessary to operate and deliver services promised to the customer. You pay the invoices and credit card bills that arrive.
But are you sure the bills are accurate? Are you getting the goods and services for which you are being billed?
You work hard for your revenue or donations, so it is important that you consider these questions before paying any vendor invoice or credit card bill:

• Were the invoiced goods or services received and accepted?
• Is the invoiced price accurate?
• For non-profits, were taxes included for goods or services for which you are exempt?
• Were all bills and credit card charges for valid business purposes?
• Has this invoice already been paid?

Invoicing and payment mistakes can be made by the vendor or by someone in your organization. You can reduce costly errors by implementing some best practices for managing accounts payable and funds disbursements. Attention to this part of your business or non-profit also sends a strong signal to your vendors, employees, and volunteers that payment activities are being monitored.
Best Practices for Paying the Bills
1. Separation of Duties
Separation of duties helps to ensure that only appropriate, authorized payments are processed by having more than one person control conflicting tasks in the payment process. Potential consequences of not segregating duties include inappropriate or fraudulent expenses being approved and paid.

• Best practice is to have different people:
  • Approve purchases or purchase commitments
  • Receive ordered materials or validate that services were provided
  • Approve payments
  • Review and reconcile financial records
• Expense payments and reimbursements for executives/leaders should be approved by a controller, Board member, or other independent party.
• Preparing the check or electronic payment should be separate from check signing/transmission.
• To avoid payment misdirection, prepared and signed checks should be mailed directly, not returned to the requestor for mailing.

If the organization does not have enough people to separate duties, a regular, periodic review should be performed by someone who is independent of the approval and payment process, such as a Board member. The reviewer should be someone familiar enough with the organization to identify inappropriate financial activity.
2. Essential Recordkeeping
Tracking electronic or paper vendor invoices helps to ensure that bills are paid accurately and in a timely manner. Consequences of poor invoice management include missed discounts, late fees, and accidentally paying the same invoice twice.

• Best practice is to ensure that:
  • Vendor invoices are electronically or manually logged and date stamped when received.
  • Vendor discounts are considered when scheduling payments.
  • Vendor invoices and supporting (e.g., receiving) documents are matched and maintained.
  • Vendor invoices are cancelled when payment is made.
  • Unpaid vendor invoices are maintained separately from paid invoices.
  • An accounts payable aging report is maintained and reviewed to avoid late fees and order holds.

Accounts payable and funds disbursement recordkeeping can be automated, manual, or a combination of both, depending on the organization's circumstances and resources. Automated processes still require human oversight to make sure the system is working properly and to address any potential issues, such as lost discounts or misapplied payments.
3. Accountability and Approvals
Accountability ensures that you authorize, review, and approve invoices for payment based on signed agreements, contract terms, and purchase orders. Establishing who in the organization is authorized to approve the commitment or expenditure of funds is an important part of safeguarding resources.

• Best practice is to implement:
  • Owner or manager approval of all vendors and extensions of credit.
  • Review and update approval authorizations periodically.
  • Invoice check against supporting documentation.
  • Owner or manager review of unpaid vendor invoices and statements monthly.
  • Reconcile ledgers for accuracy of recorded transactions.

Potential consequences of not establishing approval accountabilities include making unauthorized, unnecessary, or fraudulent payments/purchases; payments to fictitious vendors; and incorrectly coded expenses, impacting financial reporting. All of these conditions equate to higher costs for your business or non-profit organization.
Even businesses and non-profits with just a few employees or volunteers have options for implementing many of these best practices at no or low additional cost. Your accountant or Board members are good resources to help.

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