This is Part 2 of 5 posts on how to get the most cash flow out of your business. The focus of Part 2 is Payables Process Improvement.
Carefully managing cash heading out the door is absolutely crucial to maximizing cash flow. Be sure to focus on all of the elements of this process, including who, how, when, why, and how much! Getting money back that shouldn't have gone out the door is sometimes impossible. So be vigilant and almost skeptical of every payable transaction if you want to get this part right. There are countless processes involved in building an effective accounts payable system. Below are, in my opinion, are some of the most important.
1) Vendor Payment Terms. I have two insights for you on this:
- Perform an Audit - If your AP department is using an accounting system to select invoices for payment (which they should be), double-check that the correct payment terms have been setup for the vendor in the system. Do an audit of all of your vendor payment terms by comparing what your system shows to what they vendor's invoice shows. Often times there are discrepancies between the two due to inputting errors. If your system shows Net 3 when your vendor expects payment Net 30, guess what? You're paying too fast! Of course, the opposite can happen too, in which case you might want to negotiate better terms with your vendor rather than continue paying them late.
- Negotiate Better Terms - If you have a good relationship with your vendors, if you've increased your purchases with them over time, if you are expecting an increase in purchases from them, or all of the above, call 'em up and see if they are willing to give you better terms. You won't get what you don't ask for, and there's usually no hurt in asking. If you have a compelling reason, you'll likely be successful in securing slower payment terms.
2) Purchase Orders - use them! I can't stress this enough. Issuing a purchase order when you buy goods and services is the best way of preventing cash going out the door incorrectly. A purchase order shows the specific goods and services that were ordered, as well as the quantities, prices and terms you negotiated. This document is important because it is used to match against the vendor's invoice. An invoice from a vendor that does not match a purchase order should not be paid. Invoices that are paid without a matching purchase order is the number one cause of duplicate payments and payment errors.
3) Keep Score. Similar to my recommendation on the AR scorecard discussed in Part 1 of this series (which you can find here: AR Scorecard), you should set clear accounts payable metrics for your business to track your team's performance. For example, track how many times you had to void and re-issue checks each week. Or, track the percentage of invoices that match your purchase orders. Compare these numbers over the course of a few weeks and you'll know whether your performance is improving or not.
4) Triple Check Vendor Invoices. The accounting world calls it a 3-way match. Essentially, the vendor's invoice should agree to receiving documents and purchase orders. Doing so ensures the who, how, when, why, and how much I talked about earlier. It's probably the most important role your accounts payable team plays. Not doing this increases the chances that you will pay for things you never ordered or never received, and at prices above what you negotiated, not to mention paying for the same goods or services twice!
5) Take Discounts. Some vendors offer an early payment discount such as 2/10, net 30. This means that you as the purchaser may deduct 2% of the amount you owe if you pay within 10 days instead of the normal 30 days. On a $1,000 invoice, this would save you $20. How does this help your cash flow if you have to pay earlier? Well, if you calculate how much it costs you to borrow the discounted $980 invoice, you would see that, at an assumed interest rate of 3% for example, the cost to borrow that money for the 20 days is only $1.61! If you have sufficient cash balances or a readily available line of credit, you should take advantage of any early payment discounts.
Do you have any accounts payables best practices you can share? I learn as much from you as you do from me, so please add to this article in the comments below.
Stay tuned for Post #3 on Inventory and Procurement!