Module 1 of 2 · 120 minutes
Procure to pay, and the controls inside it
By the end of this module you will be able to
- Describe each step from requisition to payment and its purpose
- Explain the three way match and interpret each kind of mismatch
- Apply segregation of duties across the cycle
- Explain why goods receipting governs inventory accuracy
- State the UK statutory position on late payment of commercial debts
Amara Procure to pay. Most people can draw the diagram. What do they miss?
Nadia Why each box is there. A step whose purpose has been forgotten turns into a delay, and people route around delays. If nobody can say what the goods receipt is protecting, somebody will start receipting from the delivery note to save two minutes.
Amara Take the three way match then. What does it protect?
Nadia It stops you paying for things you did not order, did not receive, or were charged the wrong price for. Three documents created independently: the order, the receipt, the invoice. Pay only where all three agree.
Amara And each mismatch means something different.
Nadia It does, and the diagnosis is usually instant. Quantity mismatch between receipt and invoice is a short delivery, an over delivery, or a receipt entered from paperwork. Price mismatch against the order is an uplift nobody agreed or an old price list. An invoice with no order at all is not a data problem, it is somebody buying outside the process.
Amara Tolerances. Everybody sets them.
Nadia Set them small, deliberately, and write them down. A tolerance wide enough to swallow a real error has stopped being a control and become a way of not noticing. If yours absorbs five per cent on price, you have agreed in advance not to see a five per cent increase.
Amara What can the match not do?
Nadia It cannot tell you the purchase should have happened. It proves the transaction went as agreed. If the person who agreed it also received it and released the payment, everything matches perfectly and none of it was real.
Amara Which brings us to segregation of duties.
Nadia Ordering, receiving and paying in three different pairs of hands. The two oldest frauds in the subject both require one person to hold the whole chain: an invoice for goods that never existed, and a genuine invoice paid into an account somebody quietly changed.
Amara The second one is everywhere now.
Nadia It is the most common loss in small manufacturers, and the control is almost embarrassingly simple. A bank detail change is verified by telephone, on a number you already hold, never on a number in the email asking for the change. That single rule prevents most of it.
Amara A firm with four people in the office cannot separate three roles.
Nadia No, and writing a policy that pretends otherwise produces a document nobody follows, which is worse than admitting the gap. You use compensating controls. A second person reviews the payment run against receipts. Someone who does not buy reviews new suppliers every quarter. Write down what you actually do.
Amara You called goods receipting the most underrated step.
Nadia It looks clerical and it decides your inventory accuracy. The moment you receipt, the organisation asserts that a quantity of something exists in a specific place, and every planning decision afterwards rests on that assertion.
Amara And receipting from the note?
Nadia Is faster, matches the paperwork beautifully, and is how the record and the shelf start to drift apart. Then planning orders against a quantity that does not exist, and one morning the line stops for a material the system says you are holding.
Amara Damage as well?
Nadia Same moment, and this one has a hard edge. A pallet signed for without inspection and found damaged three weeks later is a claim the carrier will refuse, entirely reasonably, because your signature says it arrived in good condition.
Amara Payment terms. Sixty days is normal in manufacturing.
Nadia Normal, and worth naming for what it is. Sixty day terms mean the supplier is financing your working capital for two months. That is a legitimate negotiation. What is not legitimate is agreeing thirty and paying at sixty, which is renegotiating the contract through the payment run.
Amara What does UK law actually give the supplier?
Nadia Under the Late Payment of Commercial Debts Act, once the agreed date has passed they may charge statutory interest at eight per cent above the Bank of England base rate, plus a fixed sum towards recovery costs, plus reasonable additional costs where the fixed sum does not cover them.
Amara And where no terms were agreed at all?
Nadia Thirty days from receipt of the goods or the invoice, whichever is later. That default surprises people who assume no agreement means no obligation.
Amara Do suppliers actually invoke it?
Nadia Rarely, because they want the next order, and that asymmetry is exactly why large buyers stretch terms. What has changed is that large UK businesses must report their payment performance publicly. The stretching is now a matter of public record, and it is read by the suppliers deciding whose order to ship first when things are tight.
Amara Is there a case for paying early?
Nadia Only where the discount justifies it, and that is arithmetic rather than goodwill. Two per cent for paying twenty days early is an outstanding annualised return and worth taking. Paying early for no discount is giving away cash for a thank you.
The written material
The flow, and why each step exists
The cycle is short enough to state in one breath: somebody asks, somebody with authority approves, an order is placed, goods arrive and are receipted, an invoice arrives and is matched, and payment is made when it falls due.
Every step exists to answer one question, and the question is worth knowing because a step whose purpose is forgotten becomes a delay that people route around. The requisition asks what is needed and why. The approval asks whether the organisation is willing to commit the money. The order is the legal commitment. The receipt asks whether what arrived is what was ordered. The match asks whether the invoice describes something that genuinely happened.
The three way match
The match compares three documents that were created independently: the purchase order, the goods receipt and the supplier invoice. Payment proceeds only where all three agree on what, how many and at what price.
Each kind of mismatch means something specific. A quantity mismatch between receipt and invoice means a short delivery, an over delivery, or a receipt entered from the paperwork rather than from the pallet. A price mismatch between order and invoice means an uplift that was never agreed, or an old price list. An invoice with no order at all means somebody bought outside the process, and that is a conversation about behaviour rather than a data problem.
Tolerances are normal and should be small, deliberate and written down. A tolerance wide enough to absorb a real error stops being a control and becomes a way of not noticing.
Segregation of duties
The principle is that no single person should control a transaction from beginning to end. Ordering, receiving and paying should not sit in the same pair of hands.
The reason is concrete rather than theoretical. Where one person can raise an order, confirm that goods arrived and release the payment, the two oldest frauds in the subject become straightforward: paying an invoice for goods that never existed, and paying a genuine invoice into an account that has been quietly changed.
Small organisations often cannot separate three roles across three people, and pretending otherwise produces a policy nobody follows. The workable answer is a compensating control: a second person reviews the payment run against receipts, bank detail changes are verified by telephone on a number held on file rather than one taken from the email, and someone outside the process reviews new suppliers periodically.
- The person who approves spend does not place the order alone
- The person who receives goods does not also release payment
- Bank detail changes are verified out of band, never from the email requesting them
- New supplier creation is reviewed by somebody who does not buy
- Where roles cannot be separated, the compensating control is written down and actually performed
Goods receipting is where inventory accuracy is decided
Receipting looks clerical and is not. The moment a delivery is receipted, the organisation asserts that a quantity of a specific material now exists in a specific place, and every subsequent planning decision rests on that assertion.
The failure mode is receipting from the delivery note rather than from the pallet. It is faster, it matches the paperwork perfectly, and it is how a stock record and a shelf begin to diverge. Once they have diverged, planning orders against a number that does not exist, and the line stops for a material the system says is in stock.
Damage and condition belong in the same moment. A pallet accepted without inspection and found damaged three weeks later is a claim the carrier will decline, and rightly, because the signature said otherwise.
Payment terms and the law on late payment
Payment terms set when an invoice falls due, commonly thirty, sixty or ninety days from invoice date. They are a commercial negotiation and they are also a financing arrangement: extending terms means the supplier is funding your working capital.
In the United Kingdom the Late Payment of Commercial Debts (Interest) Act 1998 gives a supplier the right to statutory interest at eight per cent above the Bank of England base rate once the agreed date has passed, together with a fixed sum towards debt recovery costs and, where that sum does not cover them, reasonable additional costs. Where no term is agreed, the default is thirty days from receipt of the goods or the invoice, whichever is later.
Large UK businesses must also report publicly on their payment practices and performance, including average time to pay. Buyers who treat terms as a resource to be stretched should know that the stretching is a matter of public record.
Paying early, paying late, and the middle
Paying late damages the relationship with exactly the suppliers most able to make life difficult later, and it is remembered when allocation is tight and somebody has to decide whose order ships first.
Paying early costs cash for nothing unless a settlement discount is genuinely worth taking. A two per cent discount for paying twenty days early is an exceptional annualised return, and one worth calculating rather than assuming.
The defensible position is to pay on the agreed date, reliably, and to negotiate terms honestly at the point of agreement rather than renegotiating them silently through the payment run.
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