Managing Your Accounts Payable
Last month on the blog we discussed managing your accounts receivable and how your customers can help, or hurt ,your ability to get credit and capital. Oftentimes the cash flow crunch we see impacting our clients is two fold. One side is slow paying accounts receivable, but equally impactful is the need for cash to pay vendors and suppliers. Managing accounts payable takes some finesse but here are a few things to consider.
Negotiating Terms
First, analyze your accounts payable to see where your biggest expenses lie. Is it raw materials? Professional services? Payroll? In some cases, especially for inventory, you may be able to negotiate longer terms with your vendors. Even going to Net 10 or Net 30 can give you a few extra days. Unfortunately, if people are your biggest cost, payroll cannot be done on credit and you will need to plan accordingly.
Stay Organized and Pay On Time
If you aren’t yet eligible for terms with your vendors, the best thing you can do is establish yourself as a reliable customer. Staying organized with your bills; entering them correctly into your accounting software and having a plan to pay them on time are all key. Do you have a designated person assigned to reviewing invoices for accuracy? Is there a set approval process so bills are paid on time?
Consider PO Financing
Sometimes growth is the main inhibiting factor to paying your payables on a good schedule. Although you may be profitable, you simply can’t make ends meet between producing your product and waiting for payment from the customer. As a short term solution purchase order financing advances money to you based on a purchase order. You can use that capital to pay your suppliers, produce your products and get them out the door. Then, when your customers are invoiced, you can factor those invoices to pay of your initial PO loan.
Other Financing Options
As mentioned above, factoring is another financing option that speeds up the cash flow from your accounts receivable, which often helps you better meet your accounts payable obligations. In addition, inventory loans or lines of credit can be obtained to help smooth out the bumps in maintaining an inventory. They can also help in times where inventory needs to grow to keep up with demand. Be prepared with good financial data available to support the need for increased inventory and show how this increase will lead to better revenue and profit.
At the end of the day, if your products and services don’t create enough revenue to cover your accounts payable, the problem truly comes down to squeezing out additional profitability from your business model. That requires a focus on cost savings, increasing sales and managing your processes well. But, assuming your business is on the path to profitability, several things can get in the way of having enough cash flow including top line growth, the need to expand inventory, timing and other factors. This can create unnecessary cash flow crunches due to large accounts payables due at inconvenient times. By negotiating more favorable terms with large suppliers, finding financing options and keeping your process organized, you can get ahead of these crunches and keep your business running smoothly.
