Cash Flow Swing Factors – Accounts Payable

It’s time for part three of the Cash Flow Swing Factors. By now, you should feel like you’re really in the swing of things. (Sorry, we couldn’t resist.)

The topic du jour? Accounts Payable. Undeniably less fun than Accounts Receivable, but an essential part of business nonetheless. And, in case you’re wondering, the answer is yes: we do plan to unnecessarily capitalize Accounts Payable throughout this article. It’s that important.

Sometimes Accounts Payable seems as simple as entering payables and cutting checks. But you should treat Accounts Payable just like cash. This article will help you review, tweak, measure and maximize your Accounts Payable activities. All that in one article? My, aren’t you lucky!

How a company manages its Accounts Payable processing affects two very critical things: 1) cash flow, and 2) supplier relationships. Mismanage your AP system, and cranky suppliers will be the least of your problems: you become vulnerable to late-payment penalties, interest charges, lost prompt payment discounts, and even fraud and error.

Steps For Reviewing Your Accounts Payable Strategy

Not a fraud fan? We thought not. So let’s tackle Accounts Payable. We’re going to make this easy on you by breaking it into two sections. First, we’ll discuss how to review and tweak your existing AP strategy in four steps.

1. Reevaluate your payables. If the economy hasn’t already forced you to be extra careful, consider yourself freakishly fortunate. And then review your payables. Make sure your payables are necessities, not “nice-to-haves.”
2. Have a plan. The processes for purchasing and approval need to be written down. It also needs to be very clear with regard to ownership: who does what? This is one of the most common areas where fraud occurs in businesses of any size. You want — make that need — to have systems and controls in place to minimize that risk.
3. Pay for only what you agreed to. Consider using a purchase order system and pay only what was agreed to on your purchase order. Businesses lose money every year by paying for invalid charges like freight, taxes, interest, late fees, and more. A charge isn’t valid simply because it’s listed on an invoice. Don’t be afraid to challenge questionable charges.
4. Communicate. And communicate some more. And then, just for kicks, communicate.When cash flow gets dicey, as it sometimes does, make sure you understand what you’ve got available to pay and then be very clear with the vendor about the plan. You’ll often find that vendors will be flexible as long as you’re transparent. Once you work out a payment plan, pay what you promised when you promised. Your relationships with your vendors can get just as dicey as your cash flow if you’re not careful.

How To Measure Effectiveness

Next up: measure the effectiveness of your Accounts Payable activities. Here is your handy-dandy reference guide to the ins and outs of AP:

• Days Payable Outstanding. This will tell you how many days’ worth of payables stay in your system before they are paid. You want this to (fairly closely) match the average term you get from your vendors.
• Payment types. Cutting checks and mailing them is much more expensive than electronic funds transfer or electronic bill pay. Be sure you are using the most cost effective option possible.
• Late payment and penalty charges. (Gulp!) If you’re experiencing a cash flow hiccup, some of these might be unavoidable. It’s important to understand the true cost.

And there you have it. Paying bills has never been more scintillating. In need of a bit of clarification? Guidance? A full-scale, no holds barred intervention? Our accounts payable services are just a phone call away.

One of the best ways to gain a macro view of your business is through SG&A Reporting.

If you’re looking for a trustworthy bookkeeper or accountant, contact us today to learn how Owl can help you. 

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