Today’s business climate begs people to do more with less and every industry is under pressure. Companies cannot afford to miss opportunities to free up working capital. You need to develop a strategy that gives greater availability to the cash trapped on your balance sheet. This can help to develop the added liquidity you need to streamline processes, fund growth, enhance service, reduce costs, and seize new investment opportunities. That all starts with effective accounts payable management.
What is Accounts Payable Management?
Payables management is the handling of a company’s unpaid debts to third-party vendors for purchases made on credit. Account payables management involves tasks such as seeking trade credit lines, acquiring favorable terms of purchase, and managing the timing and flow of purchase.
This is all done to efficiently control a company’s working capital.
The short-term liabilities section of the balance sheet is where the accounts payable should lie. It mostly consists of the short-term financing of things like accrued expenses, inventory purchases, and other valuable short-term operations.
There is definitely a right and wrong way to perform accounts payable. Since it is a back-office management system, it doesn’t always take center stage. Especially when a business is looking to grow. It often takes a backseat to competing priorities. However, if you intend to optimize working capital, a payables strategy should be the core priority.
In response to the need to optimize, what many companies do is delay payments. They will extend payables for as long as possible to maximize the free cash flow. However, this approach is typically not correct. For one, delaying payment can erode supplier morale and goodwill. This can result in slower deliveries, less willingness to fix issues, delayed responses to important queries, and more strict payment terms.
On the contrary, paying early can yield substantial benefits like early payment discounts and rebates. Really it also comes down to doing good business. Floating another company’s money doesn’t always look good.
Organizational change is rarely easy but it is essential to foster a working capital culture. For a small business, it can yield sizable benefits. Refining the payables process enhances the accuracy of your cash flow predictions. This enables a payable department to help set better budgeting, which will ultimately position a company to improve liquidity. It also helps to mitigate any gaps in funding and realize higher profits.
The insights gained from effective accounts payable management can strengthen your negotiating power and help you partner with better suppliers. Using the company’s cash the right way means extended payment terms, increased warranty periods, or even special holds on inventory.
Every business owner should know there are inherent risks when you fail to adopt an effective accounts payable process. It can slow invoice processing, keep you from discounts, and get you unsatisfactory payment terms. Here are a few mistakes to avoid:
- Fail to issue purchase orders for each order.
- Rely heavily on error-prone manual processes (especially when approving requisitions).
- Do not confirm if deliveries match contractual terms.
- Cannot easily access vendor contracts.
- Neglect to take advantage of maximum savings through trade spend initiatives or volume rebates.
- Lose access to early payment discounts by over-extending your pay cycle.
- Accept discounts before calculating the cost of capital outlay.
- Incorrectly input supplier or contract data into master files.
- Lack any systems or processes to prevent late payments, duplicate, under/over, or missed.
The entire idea is to be on your game and make as few mistakes as possible. If you do not have the labor available, there are many brands of accounting software that can also keep an eye on things.
This is why a business must take a more strategic approach to accounts payable management. The AP team, along with the purchasing and procurement department, should always collaborate with senior management to establish a working capital culture throughout the company.
A lot of that comes down to invoicing. Are they being received and processed in a timely fashion? A company should be adopting a management strategy that will prioritize the importance of freeing up working capital through the optimization of payables.
While some businesses may choose to adopt a custom approach, there are some strategies that work across the board.
Centralizing Accounts Payable
Use a shared service environment for processing and reporting. This ensures that all employees adhere to common standards and practices. It’s important to measure everyone’s performance against established metrics. This enables a company to accomplish more tasks in a shorter time frame (with fewer resources). Ultimately, this will reduce enterprise costs.
Adopting Strong Governance Practices
Not only does this strengthen internal controls, it reduces manual error around the entire accounts payable process, as well as contract review.
Automate your payables management with electronic data interchange (EDI). Although it’s not for everyone, a company that considers electronic communication with vendors will streamline the approval process and create more timely payments. This means you get to take advantage of available discounts and rebates for being an early (or on-time) bird.
An electronic payable system enables a business to perform a variety of tasks that save a lot of time. This includes things like:
- Automatically generate purchase orders
- Track goods received
- Validate and accept invoices
- Approve requisitions
- Pay invoices on the right due dates
Depending on the degree of automation, you may even be able to scan invoices electronically, resolve disputes, and track delivery receipts.
These should be set up so that suppliers can track what your business is doing. This can include activity such as:
- Potential product shortages
- Status of an order
- Scheduled delivery
- Payments received
A supplier portal will cut down on manual errors and create convenience for your vendors. It will also help to improve order accuracy.
Setting up management workflows can help to quickly identify problems and enhance the efficiency of your accounts payable process. It will resolve system bottlenecks and streamline handoffs. This helps to vastly improve liquidity management in the most effective way.
Always define the level of management authority that is required for various purchases. It may differ depending on price or quantity.
A successful accounts payable department not only works with automation but understands the meaning of strong business relationships. It’s not enough to simply pay a vendor, you need to work with them. The better you treat your suppliers, the better deals you get. It’s that simple.
After that, the best practice is to find accounting software that fits your business and start to look at the various ways to optimize the accounts payable process. Then watch your working capital double.