Rants on Accounting Part 1: Flat Terms are Flat Tires

Flat Terms, is a TERM I use to describe the policy of telling everyone that all bills will be paid within a certain time frame from the delivery date. For example, if I ask for 90 Day terms on Apple Laptops, and then vendor delivers on August 1st, then they can expect a check from me on November 1st.  It does not matter if I buy 1 laptop or 200, the terms are flat.

I suppose in some businesses this might work, but in a business focused on revenue generated from tuition cycles and application fees, this is not only a bad model, it is a lose-lose model most of the time for everyone involved.

Classic game theory teaches us the setting up a win-win or win-mostly win situation is always important. Suppliers have be considered in the game as allies, not enemies. Alienating them by repeatedly hurting their cash flow is not a good idea. Suppliers are finite for most things, and by reducing them down to smaller numbers (sometimes that number is 1) a dependence is created which will turn into an exchange of fists and elbows instead of an exchange for goods and services. Not only that a false monopoly could occur in the favor of the vendor.

The ideal situation for purchasing things, especially IT gear and software, would be to have an approved cash reserve with target dates. The idea being that a percentage of the budget would be set aside and spending would be conducted during targeted intervals using cash on delivery and/or wire transfers for the majority of purchases. This gives the buyer the most power and leverage. The policy allows for larger stocks of slightly older gear to be purchased resulting in a net savings against the budget.

In a perfect world the revenue cycle of the institution would determine when spending can start and when it must stop to avoid carrying outstanding payments and damaging credit and credibility, the latter often being more important.

The concept that all vendors should be pushed to the same payment terms for every transaction is mathematically unsound. Terms should be determined based-on the size of the order and the date the goods need to be delivered.

For example, it is November 1st. 95% of all tuition has been processed. I need to buy a quantity of 100 laptops from Apple. The Apple vendor will offer me an additional 10% on new stock and a 20% discount on stock in their warehouse if I can pay the full amount within 30 days.

Based-on the math, and the fact I have money available, it would be insane to insist on terms longer than 30 days. I am going to save money in the budget on a significant order.

Now assume the same purchase needs to be made, but it is May 1st. Tuition notices have just gone out, and 60% of all revenue I might have is going towards salaries and summer expenses for renovations etc.  In this case, I would have to decline the offer. I am focusing on the revenue cycle and the size of the savings, and not the flat concept that every purchase is equal.

Now look at something completely different, a niche product like a large streaming server. I am never going to really save on a single product. It will always cost about the same all year. So how do I decide the terms?  Well looking at the whole relationship with the vendor I might be able to tell them, “We are spending money with you in November on 100 laptops with terms of 30 days plus discounts. So we would like to pay for this server at that time, full price of course.”

I am considering the whole games, and trying to leverage a large purchase to get an early acquisition on niche product. Ignoring the game for one significant play is a mistake.

An accountant might claim this is hard to manage because there are SO MANY VENDORS. In fact I have found that most schools rely on a small number of vendors for the majority of their purchases. The policies used should be based-on reality and not on a textbook version of purchasing.

Keep in mind that if you get what you want within your budget, or with net savings, you win. If the vendor gets paid ON-TIME and gets more orders in the future they win. However, if you apply FLAT TERMS during the entire school year then orders due May 1st will probably not get paid until August.

This means you have created a policy that hurts vendors, and in the fall when you need orders quickly, you will find vendors have very little sympathy. All the past orders will have to be paid before anything else is even processed. In some cases equipment and services would not be received until November or December.

Teachers and students need resources when school starts, not half way into the year. Accounting should not be undermining educational initiatives with inefficiency that is not saving money.

In PART 2, there will be more of a focus on the revenue cycle and how it should be a cornerstone of all conversations and decisions.

Tony DePrato

http://www.tonydeprato.com

About Tony DePrato

about.me/tonydeprato
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