Two Accounting Methods to Factor NetSuite Accounts Payable Purchases

This article is relevant if you are using NetSuite to factor your purchases or accounts payable.

Background

We have a client that is in the soft goods (apparel) industry with major retailers for customers who are notoriously slow payers — this puts a strain on the demand for working capital. We work with the client’s NetSuite Administrator who, in my mind, represents a strong case for the ideal profile for today’s IT professional: he understands the business operations, he has good people skills, and he understands many of NetSuite’s built-in point-and-click capacities to help drive high user adoption. The organization works with our team to optimize advanced NetSuite accounting concepts and to gain access to many of the bundles and other know-how that represent years of delivering NetSuite solutions to our other clients.

The Administrator came to us with an interesting challenge. The organization finances its inventory purchases by using a factoring company. As an approach to access working capital, similar to accounts receivable factoring (to obtain cash early, revenues earned from reliable customers can act as collateral for short-term loans), inventory purchased can also act as collateral and be financed from third parties.

In the conventional accounts payable approach, a purchase order represents a commitment to buy goods and services, the receiver represents the delivery of the goods or service, and thus an obligation (liability in the form of an accrual) is formed, and finally the vendor bill represents the formal supplier’s request for payment (the accounts payable obligation). Once all those elements come together, most suppliers offer terms to pay the vendor bill giving you time to acquire cash. Yet, if you don’t have cash, you have a working capital challenge.

To solve the working capital challenge, factoring comes forth. Under the idea that instead of paying the supplier directly, you will put in place another arrangement to pay the factoring company. The factoring company will then pay the supplier’s bills. Yet, NetSuite is designed to pay the supplier, not the factoring company. Thus, what do you do?

Two Approaches to Factor NetSuite Purchases

In the brainstorm with our client’s Administrator, we came up with two different approaches that I suspect would be valuable to consider:

  1. Line Clearing Account Method
  2. Payment Liability Methods

Line Clearing Account Method

Similar to the vendor deposit methods discussed here, Watch How To Automate NetSuite Vendor Deposit Prepayments, under the Line Clearing Account Method, create a non-inventory item with a pointer to a liability account which will represent a temporary holding account. The general ledger account should normally be zero if your practice is set up right. The idea is to transfer the liability from the supplier to the factoring company. Here is what you do:

  1. Add Negative Clearing Line to Vendor Bill: enter the vendor bill to match it against the purchase order as normal. Then add one more negative line to the vendor bill for the total amount of the bill. This will make the vendor bill become zero and appear paid. It effectively debits what normally would be accounts payable and then credits the temporary liability account.
  2. Create Factoring Company Vendor Bill: now create a new bill to the factoring company and include one line on the bill using the temporary clearing account. This will debit the temporary liability account (netting it to zero) and credit accounts payable. Use descriptions and other account information as needed to help you cross-reference to the original supplier bill.  If you really want to get fancy, create a custom transaction body field that can cross-reference each respective vendor bill.

If the accounting period is already closed when this practice is implemented and thus the supplier’s vendor bill cannot be modified to add the clearing line as it locked, then you can substitute the line operation with a Vendor Credit transaction (typically known as a debit memo; not discussed further) of similar nature.

This method effectively moves one vendor liability to another vendor. Controls are needed to ensure that the line clearing account is always zero.

Payment Liability Methods

The Payment Liability method represents a different approach for which my client’s Administrator brought to me. We contemplated these below.

When it is time to pay a liability, you generally select a bank account to pay the bill. What if you instead substitute a placeholder account versus your real bank account? This is similar to my article, Best Practice: Account Clearing Method for NetSuite Electronic Payment Method Reconciliation. There are two methods you can use here:

  1. Credit Card Liability Account
  2. Bank Clearing Account

Credit Card Liability Account

By creating a Credit Card Liability account, you are effectively deeming the factoring company as if it is a credit card company. What is nice about this approach is that a register naturally develops that allows you to see your liability (credits grow). Then, when it is time to pay the factoring company, you write a check and reference the credit card liability account (the debit).

Bank Clearing Account

Like the Credit Card Liability account, you can deem a bank account to represent the factoring company. This too presents a register for the ledger. Likewise, when it is time to pay the factoring company, you can then write a check and can reference the bank clearing account in the Expense and Account portion of the check transaction.

Each of these approaches works by this kind of accounting:

Supplier Psuedo Payment (the acknowledgment that you are handing the liability to the factoring company)
Dr Accounts Payable
Cr Factoring Company Account

Actual Factoring Company Payment (according to the terms arranged)
Dr Factoring Company Account
Cr Operating Cash

I like these approaches because we do not have to create an extra transaction (the second vendor bill) and in some respects, it is easier to understand. However, there are two distinct drawbacks:

  1. No Liability Aging: We won’t get any type of out-of-the-box aging on those ledgers. But perhaps that does not matter in this arrangement?
  2. Balance Sheet Presentation: NetSuite out-of-the-box balance sheet use General Ledger Account types to format the presentation. The credit card liability account at least keeps the amount due on the current portion of the balance sheet liability section. The bank clearing account approach will show a credit which will typically confuse the average financial statement listener. Each of these concerns can be overcome with a reversing reclass entry or by creating a custom balance sheet presentation format.

Considerations and Conclusions

I was surprised when our client elected to go with our originally conceived solution, the Line Clearing Account Method. They favored the separate bill handling and the built-in Accounts Payable features available. Yet, I appreciated what was possible with the payment method approaches suggested by our client’s Administrator.  More importantly, as I think about possible other client situations, the method for communicating the information needed by the factoring company and the desire to stay in control would influence what method should ultimately be adopted.

In my mind, this situation illustrates the flexibility of the NetSuite platform and the ingenuity that can be applied to real-world challenges. If you have a similar situation, let’s have a conversation.

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Marty Zigman

Holding all three official certifications, Marty is Southern California's NetSuite expert and leads a team of senior professionals at Prolecto Resources, Inc. He is a former Deloitte & Touche CPA and has held CTO roles. For over 25 years, Marty has produced leadership in ERP, CRM and eCommerce business systems. Contact Marty to set up a conversation.

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