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Following on from our 5 ways to improve your cash flow and how your accounts system can help we go deeper into improving your cash flow by looking at managing your accounts payable.
Business relationships like most relationships take time to develop, but the benefits are long term and vital to the success of your business. For the smooth operation of your business you rely on good relations with your suppliers. When cash is tight, you may not be able to pay your invoices on time. Managed right, your suppliers will gain trust and confidence in you. Managed badly, the situation could get complicated.
We have compiled a list of suggestions as to how you can use your accounting software to manage your suppliers to improve your cash flow. Many of these you probably know already but we think it is always good to be reminded!
Finding good suppliers and maintaining solid relations with them can be an invaluable tool in the quest for good cash flow management and business success. The right suppliers could be your route to a competitive edge through their pricing, quality, service, delivery etc so do your research.
When you have some time on your hands, review your suppliers’ performance to ensure you are getting the best deal. Question their price, quality, delivery, account management, new product innovations etc to find out if there are better deals to be had.
Contracts and service agreements are essential business tools for professional trading and business relationships. Without clearly defined and agreed contracts, misunderstandings can develop, expectations of client and provider fail to match, and all sorts of problems can occur. It is good policy to document, agree and sign important supply arrangements.
If cash flow is tight, re-negotiate payment dates and credit limits with your main suppliers. Be aware of your supplier’s right to charge interest on late payments.
Communicate with your suppliers to improve your purchasing process. Keep them informed so small problems don’t escalate into big problems.
When cash is low, the temptation is to pay your suppliers last but this can endanger the relationship you’ve built up over the years. If you ever need to delay a payment, you'll need their trust and understanding.
Get to know the people who manage your account and make sure they are easily contactable.
Identify the creditors that are vital to the survival and growth of your business and work out tactics to win their trust and confidence.
Try to be as honest as you can. You may just be encountering a minor blimp but know things will get back on track soon.
Your accounts payable system controls how and when money leaves your business bank account to pay third parties.
Use a centralised purchasing system to control and monitor the buying of goods and services from your suppliers – this facilitates internal controls and prevents misunderstanding down the line.
Ask suppliers to submit their invoices electronically. This will save you time, resources and losses due to waste.
If necessary, hold off paying your invoices as long as you still pay within your agreed credit terms. Don’t be unreasonable. If your supplier gets impatient they may put you on ‘cash on delivery’ or cut you off altogether. Don’t jeopardise your relationship.
Use electronic funds transfer (EFT) to send payments just as your invoices are due. You will remain current with suppliers while retaining use of your funds as long as possible.
Use a credit card for purchases - If you suppliers don’t charge a fee for using a credit card, use this to effectively give you 30 days extra credit.
Check out supplier deals. Some will inundate you with special offers, promotions and discounts. Use them wherever you can.
NOTE: Be careful of buying in bulk just because there is a discount on it. Holding large quantities of stock may cost you more in the long-run.
Keeping track of what you owe and when it is due will enable you to establish good credit and hold onto your money as long as possible.
The accounts payable aging schedule is an important tool for keeping track of your payables on a monthly or weekly basis.
Review your creditors regularly. Review aging schedules weekly.
Are you paying the right amount, including any discounts? Payments should be made in accordance with purchase order terms and discounts taken where allowed. Match all supplier invoices against goods received notes and purchase orders.
Analyse real-time information about sales, orders or market trends so that you can forecast and react quickly to changes in demand.
Accurate information on stock means you will only order the supplies you need.
Efficient stock control allows you to have the right amount of stock in the right place at the right time. It ensures capital is not tied up unnecessarily, and protects production if problems arise with the supply chain.
Good stock control improves efficiency, lowers costs and ensures you meet fluctuations in customer demands.
Spreading out payments monthly by direct debit can really alleviate any immediate cash flow problem as what you owe is not coming out on the one day.
These days’ suppliers are happy to accept a direct debit in lieu of waiting for months to get paid or in some cases receiving nothing. This will not only keep your creditors at bay but will ease the pressure on you to pay in one lump sum.