Financial Transactions in Procurement

The Buyer’s View on Financial Transactions in Procurement

As a professional buyer, understanding the financial transactions in Procurement is crucial for maintaining healthy business relationships and ensuring smooth operational processes. Financial transactions can vary depending on the terms of the agreement, the nature of the goods or services, and specific circumstances that may arise during the course of the business relationship.

Here’s an overview of key financial transactions from a buyer’s perspective, including handling return material scenarios:

1. Standard Purchase Transactions

Invoice and Payment:

  • Process: The seller delivers goods or services and issues an invoice. The buyer processes the invoice and makes the payment according to agreed terms (e.g., net 30 days).
  • Key Considerations: Ensuring timely payment to maintain good supplier relationships, verifying invoice accuracy, and aligning with internal approval processes.

2. Advance Payment Transactions

Prepayment:

  • Process: The buyer pays for goods or services in advance before delivery. This is common for custom orders or high-value items.
  • Key Considerations: Assessing the risk of prepayment, ensuring contractual safeguards, and managing cash flow implications.

3. Payment Upon Delivery

Cash on Delivery (COD):

  • Process: Payment is made at the time of delivery. The buyer inspects the goods and makes the payment immediately.
  • Key Considerations: Ensuring funds are available at the time of delivery and verifying the condition and quantity of delivered goods.

4. Return Material Transactions

Repair and Invoice:

  • Process: If products are found defective or require servicing, the buyer returns the items to the seller for repair. The seller repairs the products and invoices the buyer for the repair costs.
  • Key Considerations: Evaluating repair costs versus replacement costs, ensuring repair quality, and negotiating warranty or service terms.

Replacement:

  • Process: The buyer returns defective products to the seller, who then sends replacement items. This can be a direct exchange or the buyer may receive replacements before returning the defective products.
  • Key Considerations: Managing inventory levels during the replacement process, ensuring timely receipt of replacements, and verifying that replacements meet quality standards.

Receipt and Credit:

  • Process: The buyer returns products to the seller and receives a credit or refund. This transaction is often used when products are unsatisfactory or excess inventory is being returned.
  • Key Considerations: Tracking returned items, ensuring accurate credit processing, and managing financial records to reflect refunds or credits accurately.

5. Dispute Resolution Transactions

Chargebacks:

  • Process: If there are discrepancies in the delivery or quality of goods, the buyer may issue a chargeback to adjust the payment made to the seller.
  • Key Considerations: Documenting discrepancies thoroughly, communicating effectively with the seller, and ensuring internal processes support chargeback issuance.

6. Incentive-Based Transactions

Discounts and Rebates:

  • Process: The seller may offer discounts for early payment or rebates based on volume purchases. The buyer applies these incentives during the payment process.
  • Key Considerations: Ensuring compliance with discount terms, accurately calculating rebate amounts, and reflecting these incentives in financial planning.
 

Invoice and Credit Invoice Explained

Invoice:

  • Definition: An invoice is a financial document issued by the seller to the buyer, detailing the goods or services provided, their quantities, and the amount owed by the buyer.
  • Purpose: It serves as a request for payment and includes payment terms, due date, and other relevant transaction details.

Credit Invoice (Credit Memo):

  • Definition: A credit invoice, or credit memo, is issued by the seller to the buyer to correct a previous invoice. It reduces the amount the buyer owes due to returns, allowances, or errors in the original invoice.
  • Purpose: It documents the reduction in the buyer’s obligation, effectively serving as a refund or adjustment.

Netting Invoices and Credit Invoices

Netting Process:

  • Definition: Netting involves offsetting the amounts of the invoice and the credit invoice against each other.
  • Application: When a buyer receives a credit invoice, it can be used to offset the amount owed on the original invoice.

Example:

  • If a buyer receives an invoice for $1,000 and later a credit invoice for $200, the net amount owed would be $800.
  • Instead of paying the full $1,000 and receiving a separate refund of $200, the buyer can simply pay the net amount of $800.

Conducting a Payment:

  • Netting: Yes, one can net these documents and not conduct a separate payment for each. The buyer would only pay the net amount after accounting for the credit invoice.
  • Record Keeping: It’s essential to keep accurate records of both the original and credit invoices and the netted payment for auditing and financial tracking purposes.

International payments

To execute an international payment, several key elements are needed to ensure the transaction is processed smoothly and accurately. These elements include:

  • Beneficiary Details: Complete information about the recipient, including their name, address, and bank account details.
  • Bank Information: The recipient’s bank details, such as the SWIFT/BIC code and IBAN (International Bank Account Number), which standardize international transactions.
  • Payment Amount and Currency: The exact amount to be transferred and the currency in which the payment will be made.
  • Purpose of Payment: A brief description of the payment’s purpose, often required for compliance and regulatory reasons.
  • Exchange Rates: Awareness of current exchange rates, as they affect the final amount received by the beneficiary.
  • Compliance with Regulations: Adherence to international financial regulations, including anti-money laundering (AML) and know your customer (KYC) requirements.
  • Payment Method: Choosing a suitable method for the international transfer, such as wire transfer, international ACH, or payment through a financial intermediary.

Learn more at Swift.

Summary: Financial Transactions in Procurement

Financial transactions between buyers and sellers encompass a wide range of activities, from standard payments to handling returns and disputes. As a company, it is essential to have clear processes and controls in place to manage these transactions effectively. This involves ensuring timely and accurate payments and maintaining comprehensive records for all financial activities. By understanding and managing these transactions efficiently, buyers can foster strong supplier relationships, optimize cash flow, and support the overall financial health of the organization. 

Financial Transactions in Procurement does not always need to be executed. Netting invoices and credit invoices simplifies the payment process by allowing the buyer to pay the adjusted amount directly (if any), ensuring clarity and efficiency in financial transactions.

Standards like SWIFT and IBAN streamline and secure the process of international payments by providing a consistent format for bank identifiers and account numbers globally. These standards help reduce errors and ensure funds reach the intended recipient quickly and safely.

Learn more about the operative buyer role in the bundle of courses Basics for an Operative Buyer. In this bundle of courses, we delve into the essential role of procurement and its evolution over recent years. Our curriculum is anchored in the foundational theories of Arjan van Weele, who outlines the operational and tactical aspects of procurement, and the insights of Gadde and Håkansson on the buyer’s decision-making process. We explore how procurement choices impact the daily operations of buyers and the adaptability required in handling various products and services. Financial Transactions in Procurement is supported by the department Accounts Payable.

Note: Illustration to the blogpost “Financial Transactions in Procurement” was created by Chat-GPT on June 28, 2024.

Information about our Online Procurement courses in Swedish.

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