Updated: Jan 25
Managing accounts payable is critical to maximizing your cash flow, so it’s important to understand what steps you can take to make your accounts payable processes a successful contributor to both ends. Below are 9 tips to get you on your way.
Extend Cash Flow – Extend your payments out as far as possible within the framework of your vendor agreements. In all businesses, there is a delay between when a product or service is ordered from a vendor to when that finished product or service is paid by a customer. Every business wants to shorten this cash cycle as quickly as possible, hence the reason for extending payments out.
Early Payment Discounts – In certain industries, volume customers can negotiate early payment discounts with their suppliers – often 1% – 2%, if paid within 10 – 15 days of invoice. If your employer is interested, you might discuss this with your counterpart at the supplier to see if an early payment discount could be obtained. In larger companies, a purchasing agent would handle this, but in many small businesses, the owner or bookkeeper will handle this.
Stick to a Regular Check Cycle – The best practice for accounts payable is to set a regular payment cycle. Depending upon your business, this could be weekly, biweekly or semi-monthly or monthly. Our recommendation is to reduce the payment cycles to once or twice a month. This reduces the amount of time and effort you spend making payments and lessens the chances for other mistakes too.
Automate Payments – This works well for regular, routine bills, such as utilities and other subscription-based services the business may have. Anything that reduces the amount of work and doesn’t create cash flow issues to automate, are great candidates for automation. We apply this concept to our clients and it is a godsend!
Stagger your Checks – If your business is super tight on cash, it will likely be necessary to implement a process to stagger the release of your accounts payable checks. In this way, you can minimize the opportunity for any overdrafts to occur. There’s nothing worse than getting hit with overdraft fees on bounced checks and staggering the release of payments is an effective tool to reduce that risk.
Keep Track of Checks Outstanding – Once you cut a check and it is signed, you have an outstanding check. Once the check clears your bank, the check is no longer outstanding. In between the start point and the end point is the “float” – the varying, enigmatic length of time a check remains in your drawer to be released, in the mail, or on a supplier’s desk awaiting deposit. “Float” is a great term for it, right? You need to keep track of this in some manner, when cash flow is tight. You want to avoid overdraft fees, so know what checks you have outstanding is an important component in doing so.
Communicate with your Supplier – When you are unable to meet payment terms with your supplier for whatever reason, it is important to communicate this up front to your supplier. This is helpful for two reasons. First, it’s the right thing to do. If you can’t live up to the terms, then the supplier should know ahead of time. Second, very few companies do this. When they do, suppliers are far more likely to be amenable to alternative payment arrangements. Go ahead and give it a try. You’ll be surprised how pleasant the conversation can be!
Request Longer Payment Terms – If cash flow remains an issue, you might negotiate longer payment terms for a temporary period of time. If the supplier is agreeable, make sure you can live up to those terms. Your supplier relationships are important.
Consider installments – If cash flow continues to be a problem, then request an option for installment payments. Your supplier will be anxious to receive any funds, so installments could be a great alternative for them. Again, don’t abuse this option. It should only come into play if no other alternatives are feasible and make sure you live up to the installment terms.
Incorporating these tips into your accounts payable processes will ensure cash flow is maximized and your suppliers are communicated with appropriately and paid timely. If you need help in incorporating these tips in your business or need additional cash management help, don’t hesitate to contact us at UCentric Solutions, LLC or click here to set up a free consultation. It’s part of the core services we provide our clients, because the health of your cash flow is paramount to your business.