Just as you should have effective systems for receiving cash, you should also have the right systems for paying out cash. In fact, your accounts payable system is just as important as any other aspect of your business. Therefore, it should be aggressively managed and kept in line with your goals and financial status.
Your bills should not only be paid, but they should also be planned. By intelligently planning your bill payments, you’re able to create a flexible system that can be manipulated in response to uncertain factors – such as sales decreases and slow collections. In addition, this kind of planning is also a great way to lower your tax bill.
And while there is no standard AP system that works for every business, there are a few general guidelines that every well-managed system should follow:
1) Evaluate Cash Flow: Your strategy should be based on your current cash-flow realities. In particular, as a small business owner, you should monitor your cash-to-cash cycle. That is, the amount of time that passes between your purchase of inventory – or services – and the cash receipts of the related sales.
2) Prioritize And Set Goals: Write down your goals for paying vendors. When this is not done, it’s common for business owners to simply pay the vendor that yell the loudest. Instead, set your goals to pay vendors according to the overall benefit of your company.
3) Negotiate With Your Vendors: Aside from bankers and tax authorities, you may be able to achieve optimal payment terms through negotiation with vendors. Of course, this should be done when orders are being placed – not will bills are due or overdue.
4) Forecast Cash Needs: You should be able to predict your cash needs and know – with reasonable accuracy – if funds will be available from bank accounts or credit lines.
5) Keep good payables records: Weekly updates should be kept about the aging of outstanding bills. Also, for each bill paid, you should retain the related sales order, delivery records, payment invoices, cost records, etc.