Sometimes it can seem that Accounts Payable, or A/P, is a simple, mundane task. In reality, it can be a very effective tool in increasing cash flow and spotting potential fraud within your company. Whether you are a small business with one customer of a Fortune 500 company with billions in revenue, paying bills will always be part of your business. Keeping your accounts payable records clean is vitally important to any business. Even companies whose books don’t get routinely audited will need to keep them in good shape for when they apply for a bank loan or credit approval. As a former business banker, I’ve seen many bank loans turned down due to unclear financial statements and muddy books. By implementing best business practices you can streamline your accounts payable process and be prepared for future growth. Below are 5 tips to help you successfully manage your accounts payable:
Vendor Terms May Be Negotiable. Usually invoices will automatically come with Net 30, Net 60, 2%10 Net 30, etc. Regardless of the terms given, you can call your vendors and negotiate terms for your own company. Depending on the desire for the vendor to have a relationship with your company, they will be willing to extend longer terms to you. If not right away, then ask for an extension starting in 6 months from now. The longer your terms, the better your company cash flow will be.
Document all accounts paid, By clearly marking the invoice “Paid” and writing the check number and date that was used, you will better be able to track what is still outstanding and what has been paid. Yes your accounting software tracks this for you, but when you have a pile of bills to pay it is extremely helpful to have a stamped “PAID” right on the front page to determine if an invoice is still outstanding or not. I also like to stamp when an invoice was received. By simply going off the date on the invoice, you don’t know how long a vendor held onto that invoice before mailing it or how long the mail took to get to your location.
Institute a policy segregating duties. For example, it can be risky to permit the people who are responsible for preparing the checks to be the same people who approve payment. Similarly, do not let the person who does A/P do the bank reconciliation. A system of checks and balances will keep a greedy, dishonest employee from harming your business.
Simplify Your Accounts Payable Process. There is no need to write checks more than once per week. When you do process AP, the accounting department should have the invoice backup ready and invoices approved by the appropriate department heads before coming to you for signatures. Another things to keep in mind when processing AP is letting the Accounts Payable department be aware of any cash disbursement ceilings for each check run so they can then select the most important invoices to pay; usually they will want to pay the oldest invoices first. Lastly, empower your staff with decisions that will make your life easier and are safe for them to make. For example, allow them the decision-making capabilities to make partial payments on larger balances, or delaying payments to vendors who have a higher tolerance on due dates. This frees up your time and allows for some autonomy for your employees to work towards improving the cash flow.
Watch Vendor Terms for Discounts. If Cash Flow is looking good, why not take advantage of the discounts! While this doesn’t help with your business cash flow per-se, it does lower your expenses. At the end of the year, this can make quite the difference. While most entrepreneurs focus on extending credit terms with vendors, it’s important to also discuss discounts if invoices are paid early. Earning a 10% discount if paying within 7-10 days is common; ask for more!
What are your best AP practices? Leave a comment below!