This article outlines ways to improve your cashflow and profit by carefully looking at your Accounts Payable actions.
How to use your Accounts Payable to your advantage
Accounts 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.
Accounts Payable is the “flip-side” to Accounts Receivable. As we discussed in an earlier article, 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.
Paying suppliers too much, too quickly and wasting discounts
If you don’t pay any attention to Accounts Payable, you could be losing out on money and opportunities. Suppliers do make mistakes on invoices.
I remember a supplier sending in an invoice that had a $5000 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 to this. $5000 was a lot of money back in 1993 (as it still is today!).
Paying suppliers too quickly is a common error made by many businesses. It’s tempting when a supplier calls up to immediately get the boss to sign a cheque and get them “off your back”. This could be a very expensive reaction.
If you analyse your average days payable, ie, 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. It can be tens of thousands of dollars. This is valuable working capital for your business.
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 (especially if they are suppliers of goods for sale).
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.
Again this can mean tens of thousands added on to your gross profit and bottom line.
Not recognising the value you provide to suppliers and getting 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, and go back to them to negotiate better terms or even 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 of vital working capital.
Damaging 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.
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 very damaging to working capital if you have to fund purchases with cash on delivery terms.
Not knowing what you owe, to whom and for how long
If you don’t have a system for tracking Accounts Payable then it’s very difficult to know your near and far future obligations and cashflow position. If your business is growing this 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 you demonstrate you have your finger on the pulse of your business.
Not understanding the impact of Accounts Payable on working capital requirements
Working capital is a vital issue for every business, and Accounts Payable makes up a large part of working capital, ie, the quicker you pay suppliers the higher your working capital requirement will be.
Working capital is the amount of cash you need to fund sales. If you offer credit terms to your customers and keep stock lying around for a while, the money tied up in these items is working capital.
Accounts Payable adds to this requirement, so if you are paying suppliers haphazardly you could be shooting yourself in the foot in regards to working capital.
CAD Partners is a team of financial controllers who can review your accounting systems and advise on how you can improve your cash position and profitability.
Go to www.cadpartners.biz.