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.
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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.