We have a customer that doesn't understand the concept of payment terms ...

Q. (cont.) They claim that as long as the check is cut by the due date, that is enough and they can hang on to the check as long as they like before sending it to us. We say that the payment must be received by the due date.

I'm trying to find something to send to them from GAAP or FASB – or anywhere really. Any advice?

A. Successful business relationships ultimately depend on agreement and trust. Typically, an agreement documented in writing, or a contract, specifies what each party agrees to, including payment terms. If a party is not living up to its agreement, the first step is to point it out and ask them to comply with what they agreed to.

Payment terms specify when payment is due. That is the definition. You may accept a customer that mails the payment on the due date rather than ensuring payment reaches you by the date, but that’s up to your tolerance policy. Typically, the meaning of a term is that payment is due to the supplier by the specified term.

In this case, the customer has come up with a nonsensical position, regardless of the agreed terms. Of course, cutting a check by a certain date but not sending it accomplishes nothing as far the business transaction or business relationship is concerned. If your company has delivered product or provided services, then payment is owed according to the agreed-upon terms, meaning your company should receive payment within the specified period. You may want to consider putting the vendor on different terms such as "cash-on-delivery" (COD) or even prepayment prior to fulfilling the order. Some companies make this change when the customer abuses their payment terms. The payment terms constitute a business arrangement that in our research does not appear to be set as a policy with GAAP, etc.

Cutting a check but not mailing it is also, by the way, a fraud risk for that company. Checks that have been cut, but lay around unsent, present an opportunity for someone to steal the check (or for that matter, even replicate the check and cash it prior to the original check being presented for payment—we know of a true case in which this is exactly what happened to a six-figure check).

When two parties make an agreement, there is an underlying assumption of trust that each will abide by the agreement and fulfill their part. When one party does not do so, it jeopardizes the business relationship. We recommend that upper management and sales be apprised of the situation. It may be that a simple conversation at the right title level between the companies can solve this. If not, your company must consider what steps it is willing to take next.

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