Having accounts payable means you owe money to someone. There’s nothing wrong with that. But what is wrong is not handling your accounts payable in a manner that maximizes your cash flow. Improving supplier relationships, implementing processes and looking to the future will help you keep your accounts payable at the right level, along with your cash. Here are five tricks that I’ve learned from smart clients that can help you achieve that balance.
1. Never play games with your suppliers.
I hate it when the “experts” say to use your suppliers as a way to get “free” financing instead of going to a bank. To me, that’s a recipe for a lousy supplier relationship. How do you feel when a customer extends their payments? How do you treat that customer in a pinch? You probably favor customers that pay on time and treat you with professional respect. You should do the same with your suppliers. Pay them on time. Pay them early if they offer discounts. Be their best customer. That way they will give you priority when you most need their products to sell. In the short term, you may buy a few days of cash flow by pushing payments out. But in the long term, you’ll be able to sell more and grow your business when you have good relationships with the companies supplying critical materials for you.
2. Have a purchase order process.
There should be no significant payment made in your business that wasn’t already approved in advance by you or others in your company with the authority to do so. You can pick large dollar purchases or purchases made to specific suppliers so as not to create too much paperwork. But implement a system of approvals that requires sign-offs and multiple sign-offs, and make sure you stick to the system. Don’t override it just because you’re the boss. Use e-signature platforms and take advantage of the document management modules offered by your accounting software. You’ll see the difference this makes to your cash flow.
3. Pay only twice a month.
Tell your suppliers that you’re only paying twice a month. Some may grumble, but trust me, they’ll still cash your checks. Whether you choose the 10th and 25th or the first and last Tuesday, make sure you stick to the program. Don’t diverge. Don’t make exceptions. Nailing down your disbursements process will put a clamp on your internal cash controls and better give you a handle as to what’s due and when. Cutting checks all the time and without consistency makes it very difficult to track what’s going on, which will have a poor effect on your cash management.
4. Move everything away from paper.
Paper costs more money. Manual procedures slow things down. American businesses are slowly but surely moving from check writing to online payments, but there’s still a way to go. You should be ahead of the curve. Yes, there’s the upfront pain of getting everything set up, integrated and established. But long term, the benefits will show themselves in better payables management, and therefore better cash controls. Automate your payables process by using online services like Bill.com and Dext. Move everything to online banking. Use credit cards and services like Plastiq to pay suppliers even when they don’t accept them. All of these technologies integrate with popular accounting applications and cut down on data entry time and errors.
5. Forecast your cash flow.
Every month, forecast your cash flow. It’s not that hard. Take your year-to-date income statement from your accounting system and export it to a spreadsheet. Then, estimate your overhead and operating expenses for the next two to three months based on those year-to-date amounts. Do your best to come up with a sales forecast — interview salespeople, review open quotes, and dig into pipeline reporting. Then think about any extraordinary payments that will be required in the coming quarter for taxes, one-off purchases, debt maintenance, distributions, etc. The better you are at forecasting your payables, the more you’ll be in control of your payables, and by extension, your cash flow management.
Maintaining accurate and orderly payables is critical for effective cash management. Keeping track of the above items can help.
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