How to Use Accounts Payable to Your Advantage

The last few postings have looked at how managing the payments from your customers can significantly improve your business cashflow (remember that – the most important part of your small business?????). There are only two contributors to your cashflow – how quickly you collect your money, and how well you manage your payments. Today we will look at managing your payments.

Accounts Payable may seem like a ho-hum subject, but it can be a minefield of mistakes. Opportunities to improve your cashflow and profit abound in your Accounts Payable actions. 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 $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. Imagine the impact that has on your cashflow! Check. Every. Line. Of. Your. Invoices.

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 i.e. 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 onto your gross profit and bottom line.

Not recognizing 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 realize 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. 

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 COD 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. 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 i.e. 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.

Tomorrow we will look at the No. 1 way to optimise your cashflow – a secret used by most big businesses that most small businesses don’t know about or use. Today, though, click on any of the words “cashflow” in this article and it will take you to a page where you can download “How to Use your Accounts Payable to Your Advantage” - one of Roaring Trade’s weekly book summaries and small business “how to guides”.