What Do Arrears Refer To In Terms Of Finance And Accounting In Procurement?
“Arrears, arrears – the word that sends shivers down the spine of every procurement professional. But what exactly are arrears? And why do they matter so much in finance and accounting? In this blog post, we’ll delve into the nitty-gritty of arrears and explore their impact on procurement processes. So sit tight and prepare to uncover everything you need to know about this dreaded term!
What are arrears?
Most people are familiar with the term “arrears” in relation to payment of bills, but the term can also be used in other contexts. In finance and accounting, arrears usually refer to interest or dividends that have not been paid when they were due. Arrears can also refer to amounts owed under a contract that have not been paid, or invoices that have not been paid on time.
How do arrears impact procurement?
When a company or individual procures goods or services, they are typically required to pay for them in full and up front. However, there may be cases where the supplier offers credit terms, allowing the buyer to pay for the goods or services over time. In these cases, the buyer is said to have an “account receivable” from the supplier.
If the buyer does not make their payments on time, they will begin to accrue “arrears.” This means that they owe money to the supplier for goods or services that have already been delivered. Arrears can impact procurement in a number of ways.
First, if a company has a lot of arrears, it may find it difficult to obtain new lines of credit from suppliers. This can limit their ability to procure necessary goods and services in the future. Additionally, suppliers may be reluctant to do business with a company that has a history of paying late.
Second, arrears can impact a company’s cash flow. When payments are late, it can put strain on the company’s finances and make it difficult to meet other financial obligations. This can eventually lead to insolvency if left unchecked.
Third, arrears can damage relationships with suppliers. If a company frequently pays late, suppliers may start to view them as unreliable and unprofessional. This could lead to suppliers terminating their relationship with the company or charging higher prices for goods and services in the future.
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What are some best practices for managing arrears?
When it comes to managing arrears, there are a few best practices that can help ensure timely payments and avoid costly penalties.
First, always keep accurate records of invoices and payments. This will help you easily track which invoices are outstanding and follow up with the appropriate parties.
Second, establish clear payment terms with your vendors and customers. This way, there is no confusion about when payments are due and you can avoid late fees.
Third, set up a system for tracking payments. This could include using accounting software or creating a spreadsheet to track invoices, payments, and any interest or late fees incurred.
Fourth, stay on top of communications with your vendors and customers. If you know an invoice is going to be late, reach out to the vendor ASAP to explain the situation and make arrangements for payment.
By following these best practices, you can avoid costly penalties and keep your finances in order.
Conclusion
In conclusion, arrears refer to payments that have not been made on time according to the terms of a contract. They are an important part of financial and accounting in procurement as they can significantly impact both parties involved if left unresolved. It is essential for businesses to keep track of their receivables and make sure that payments are received on time so as not to incur any additional costs or penalties due to late payment. With proper tracking and management, businesses should be able to successfully manage their accounts receivable and maintain a healthy relationship with their vendors.