While in a single name context ratings are often criticized for being lagging indicators of credit quality, classifying bonds by rating is one widely used method to reflect the behavior of different risk classes in credit markets.
Many market participants argue that spreads themselves and spread volatilities are more timely indicators of an issuer’s credit risk than ratings. They consequently prefer to split the universe in spread class buckets. The disadvantage of this method is that it leads to relatively unstable compositions of the individual buckets and is less convenient, because the major index providers do not calculate indices based on spread classes. Since the different rating buckets constitute the corporate bond market as a whole, there is clearly a correlation between overall market fluctuations and the spread changes of the different rating subportfolios.
Also known as predicting cash outflow, the technique of playing the floats allows companies to predict the time it takes vendors to receive and process payments as a way to capitalize on company cash. As long as the company operates ethically, it won’t break any laws or get into any financial hot water.
Most businesses have three float options to consider: the mail float (between the time the accounting department posts payment and the time the vendor receives it), the vendor’s internal processing float, and the bank system float.
Have you ever been in a situation when the rent was due but your bank account was just a little low, so you sent out a check to pay your rent, figuring that you could get to the bank and deposit your paycheck a day or two later, before the bank processed the check? If so, then you were playing the float. What you might have done out of desperation, businesses do as a strategy for managing cash flow.
Playing the float can maximize cash disbursement, but those making that decision must be aware of possible changes that can affect that float, including a change in financial institutions or electronic payment patterns. The float could disappear overnight and your company may not realize it until it’s too late.
Making entries to the ACCOUNTS PAYABLE system is as easy as one, two, three:
1. Post purchases or other transactions to the appropriate vendor account.
2. Post vendor purchases to the A/I1 subledger.
3. Post summary of ACCOUNTS PAYABLE in the general ledger and any other offsetting accounts.
Automated accounts payable systems generally post to the vendor account, summarize those accounts, and post to the general ledger at the same time. Accountants working with manual systems will have to remember to complete all three steps with each and every entry.
- No matter how subledger files are arranged, the ACCOUNTS PAYABLE subledger summary must neatly organize, categorize, and summarize all accounts for posting to the ACCOUNTS PAYABLE line of the general ledger. The most common method in manual systems is a column-ruled sheet of paper that lists the following information for summarization:
- Date. When the purchase was made or the debt incurred.
- Vendor. To whom the money is owed.
- Purchase description. What was purchased or how the debt was incurred.
- Amount. How much money is owed.
- Expense or assets accounts. The general ledger accounts to which the purchase or debt is posted.
- Cash. Whether or not this was a cash transaction.
- Accounts payable. Whether or not this was a credit transaction to be posted to this account.
In addition to serving as a transaction summary, this A/1′ subledger summary page also is a source document for posting to the general ledger, which is generally done monthly.
Most accounts payable systems link with inven¬tory control. That way, when a shipment of materials arrives and is logged in, the warehouse entry appears immediately on the ACCOUNTS PAYABLE subledger and general ledger from which payment to that particular vendor is to be made. Again, double entries—and the occasional resulting errors—are avoided.
ACCOUNTS PAYABLE reviews are usually done once or twice monthly, although they can be done more frequently for special items such as postage, petty cash, or freight deliveries. The important thing, from a cash management standpoint, is to pay bills exactly on time and not early, to better maximize cash flow.
Despite the advantages of automation, there’s nothing wrong with a manual ACCOUNTS PAYABLE system. As long as the system performs the necessary tasks, such as assigning the right amount to the right account, tracking payments, and performing other basic accounting tasks, a manual system can be as effective as an automated one. But no matter how basic, each system must contain two primary components:
ACCOUNTS PAYABLE subledger summary Each ACCOUNTS PAYABLE system must contain a comprehensive set of vendor ledgers—whether they are recorded on index cards, in a ledger book, or on the back of candy wrappers stuffed in used envelopes—that track purchases and other financial obligations. Each record must be kept up to date with current purchases and total amounts, and they must all be sorted or categorized for easy access. After that, the format is up to your company’s accounting department.
Structured similarly to A/R, ACCOUNTS PAYABLE is another subledger that feeds the general ledger with summaries of more detailed information. Information about disbursements flows through the ACCOUNTS PAYABLE system from sources both within and outside the company and travels up to the general ledger to become part of your company’s overall financial picture.
A well-designed and well-managed accounts payable system will reliably track the amount owed each vendor and when to pay based on agreements with that vendor. The system keeps a running tally of amounts paid so it can be checked against budget. It also is the system that provides the necessary information for generating your company’s 1099 statements (for reporting amounts paid to suppliers).
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