Using accounts payable to your advantageAccounts Payable may seem like a ho-hum kind of subject, but it can be a minefield of mistakes. Opportunities to improve your cashflow and profit abound in your Accounts Payable actions.
Your objective is to keep your cash in your bank account for as long as possible. Let’s discuss some ways you can achieve this objective from managing your accounts payable.
Paying suppliers too much, too quickly and wasting discounts.
If you don’t pay attention to Accounts Payable, you could be losing money and opportunities. Suppliers make mistakes on invoices. I remember a supplier sending an invoice that had a $5,000 mistake and it wasn’t in my favour! It was discovered because we were entering each line item of the invoices into an accounting system and it didn’t add up. We were able to advise the supplier and quickly get a credit note. I dread to think what would have happened had we not been alert for this.
Paying suppliers too quickly is a common error made.
It’s tempting when a supplier calls to get the boss to authorize a payment and get them ‘off your back’. This could be an expensive reaction. If you analyse your average days payable i.e. the number of days, on average, you take to pay your suppliers, you may be amazed how much money can come back into your bank, if you can take the maximum credit terms. It can be tens of thousands of dollars. This is valuable working capital.
Conversely, not paying suppliers on time can be expensive.
If suppliers are willing to offer early payments discounts, you could be missing out on profit. If you have good Accounts Receivable procedures and get paid on time, this should allow you to pay suppliers on time and get early payment discounts. Again this can mean tens of thousands onto your bottom line.
Purchase Orders can save you thousands.
One way to reduce Accounts Payables is to ensure everything you buy is necessary. You may have staff purchasing items without knowing they’re unnecessary or potentially obsolete. A great way to avoid this is to use ‘Purchase Orders’. Have a policy where all purchases over say $100 have to be authorized by the business owner/manager. Most accounting systems nowadays can handle this seamlessly and automatically – some even allow you to authorize purchases via your smart-phone.
Recognise the value you provide to suppliers and get the best terms.
It’s easy to keep going along with the same supplier because you always have, and not realize the value of the business you provide. Some suppliers will not alert you to better value items or offer you better terms, you have to keep a track of it yourself. The best way to do this is by having a system for tracking purchases. That way, it’s easy for you to print out a report on how much business you’ve done with a supplier over a period, and to negotiate better terms or approach an alternative supplier. Obviously service levels are important too, and if they are equal then the deciding factor could be the credit terms from a supplier. Again this could have the impact of tens of thousands of dollars into your bank account.
Damaging your credit rating.
Stringing out supplier payments with no agreed terms or strategy can be expensive in terms of your credit rating. Most suppliers will expect a Credit Application, prior to doing business. If you can’t provide good references, you may find it difficult to get credit. Also if you have had a judgment against your business by a supplier, it could cause suppliers to give you a ‘wide berth’. This can be damaging to working capital if you have to fund purchases with ‘Cash on Delivery’ terms.
Know what you owe, to whom and for how long.
If you don’t have a system for tracking Accounts Payable then it’s difficult to know your near and far future obligations and cashflow position. If your business is growing, this could cause headaches. The last thing you want is to be going to the bank ‘cap in hand’ because you’ve run out of money. Banks see this approach as very unattractive. If you go to them well beforehand, and say “if this happens, I may need to borrow money”, they will see you as a much better bet, as you demonstrate you have your ‘finger on the pulse’ of your business.
Understand the impact of Accounts Payable on Working Capital requirements.
Working capital is vital for every business and Accounts Payable makes up a large part of working capital i.e. the quicker you pay suppliers the higher your working capital requirement will be.
Working capital is the amount of cash needed to fund sales. If you offer credit terms to your customers and keep stock lying around, the money tied up in these items is working capital. Accounts payable adds to this requirement, if you’re paying suppliers haphazardly you could be ‘shooting yourself in the foot’ in regards to Working Capital.
This article has been provided by CFO On-Call. For more on managing cashflow go to CFOonCall.co.nz
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