Five ways to make the most of your Accounts Payable

Accounts Payable may seem like a dull subject but when handled properly it can provide many opportunities to improve your cashflow and profit. This article discusses how to use your Accounts Payable to your advantage.

Accounts Payable is the flip-side to Accounts Receivable. As I discussed in an earlier article on how profitable businesses can go bust your objective is to keep your cash in your bank account for as long as possible.

If you don’t pay any attention to Accounts Payable, you could be losing out on money and opportunities. Here are five ways to use your Accounts Payable to your advantage:

1. Don’t overpay suppliers or settle too quickly

Suppliers do make mistakes so it is important to check the invoices. I remember receiving an invoice that had a $5,000 mistake in it 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 the total didn’t add up. We were able to advise the supplier and quickly get a credit note for the mistake. I dread to think what would have happened had we not been alert for this.

Paying suppliers too quickly is a common error made by many businesses. It’s tempting when a supplier calls up to immediately sign a cheque and get them off your back. This could be a very expensive reaction. If you analyse your average days payable, that is 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 account if you can take the maximum credit terms.

Conversely, not paying suppliers on time can be expensive, too. If suppliers are willing to offer early payments discounts, you could be missing out on valuable gross profit. If you have good Accounts Receivable procedures and get paid on time, this should put you in a position to pay suppliers on time and get those valuable early payment discounts.

2. Recognise the value you provide to suppliers and negotiate the best terms

It is so easy to keep going along with the same supplier because you always have and not realise the value of the business you put their way. Most suppliers will not alert you to better value items or offer you better terms, so you have to keep a track of it yourself. The best way to do this is by having a good system for tracking purchases. That way, it’s easy for you to print out a report on how much business you have done with a supplier over a period of time and go back to them to negotiate better terms or even approach an alternative supplier.

3. Don’t damage your credit rating

Stringing out supplier payments with no agreed terms or strategy can be very expensive in terms of your credit rating. Most good suppliers will expect you to complete a Credit Application prior to doing business. If you can’t provide good references, you may find it very difficult to get credit.

4. Know what you owe, to whom and for how long

You need to have a good system for tracking Accounts Payable so you know your near and far future obligations and cashflow position. If your business is growing, not having a good tracking system could cause huge headaches. The last thing you want is to be going to the bank cap in hand because you have run out of money. Banks see this type of approach as very unattractive. If you can go to them well before the event and say “if this happens, I may need to borrow money” they will see you as a much better bet, as it demonstrates you have your finger on the pulse of your business.

5. Take note of the impact of Accounts Payable on working capital

Working capital is the amount of cash you need to fund sales. Overly generous credit terms to your customers and stock left lying around reduces your working capital.

If your Accounts Payable isn't in order, say you are paying suppliers haphazardly, you could be unnecessarily reducing your business' working capital.

Sue Hirst is the founder of CAD partners (also known as ‘CFO On-Call’), a team of Financial Controllers who can help business owners grow their business safely.

7 comments | Add your own

My experience as a soloist is that it is all about cashflow. Then profit. Keeping on top of this is what it is all about yet it is something I as a soloist neglect because I am so busy doing what I do. Great reminder to keep an eye on this important activity that can sneak in under the radar because it isn't in the daily spotlight. Grant McDuling from Brisbane, Australia
Great article, thanks Sue. Nice to reaffirm for myself that I am doing everything right. Fantastic advice for someone who may not have thought about these details. Sara from Brisbane, Australia
MYOB Business Management Software packages allow you to easily track your accounts payable. You enter the invoice as soon as you receive it, including payment terms. You can then track through Analyses Payables, or the To Do List to alert you to when the payment is due. Heather Smith from Brisbane
whilst I acknowledge the wisdom of your advice, Sue, I tend to pay early - partly because I like to be perceived as a good customer (especially handy if you need a favour), partly because it gives me extra time to pay since the last bill in a lean period and mainly because it can be very nasty when they all start to add up and have to be paid! Grant Hyman from Sydney | Read my articles
I find my most valuable financial tool is a cash-flow spreadsheet in Excel, separated into income & expenses, broken into 52 weeks. Every morning, I check the bank account (on line), then update the cash flow. It has actuals (bills paid & payments received) & expecteds (bills received, not yet due; anticipated amounts to invoice), so I know exactly what's coming in & going out! At the start of each week, I reconcile the cash flow with the bank statement (to the nearest dollar). Near the end of each FY, I set up the next one. If that sounds a tad OTT (and I've been told it does!), I got caught with a larger-than-expected bill many years ago & its harsh impact taught me a valuable lesson: I am in business doing what I love (writing, by the way, not accounting!), but I AM in business, so best approach it that way! I am with Grant in that I prefer to pay early (but don't always). I also have a few lovely clients who pay early (interestingly, one is a boutique financial planner, & I consider her early payments to be "branding consistency" with what she does, as well as show she's good at what she does). After doing my own books for 10 years, I then found a great bookkeeping firm (on the 2nd try, the 1st were terrible!), & the next-best financial tool is: each Monday morning, I give them a bank statement for the previous week & ask them to chase up any naughties! That keeps me separated from chasing money, plus ensures AR is on track (as Sue says it should be!). This whole approach means I don't stress about money so much (unless a whole lot of clients string out!), &, probably more importantly, if there's going to be a lean time, I am anticipating it & can deal with it appropriately -- not be knocked for 6 by it. Samantha Schelling from www.thewordco.com.au
Thanks Sue, I needed your articile I have come back into our business full time after a few years chasing a retail career, ( but thats another story) I seem to have let this area slide, paying bills more or less when I have time, I see now I need to get this under control to avoid running out of money. So today I am going to set up a spreadsheet and keep control of the cash flow !! Thanks heaps Rose Nation from Caloundra
Samantha, it's great what you do! Well done. I must say you are the minority, not many businesses do take time to create a cash flow spreadsheet not to mention to check it.
Despite using MYOB, in my experience, using a cash flow spreadsheet is useful and most importantly checking it weekly is a must for a successful business. Why do I recommend the spreadsheet? Not all business owners can read MYOB or other accounting software reports. Having this in mind I’ve created an excel spreadsheet template for businesses which is easy to grasp for all. Checking cash flow reports should become a weekly routine combined with Sue’s great tips, you are on the right track.
Judit Nagy www.theofficewitch.com.au from Sydney

7 comments | Add your own

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