Summer is heating up, but an economic snowball is growing larger every day. Many businesses are seeing wild fluctuations in revenue and cash flow, which may translate into ballooning accounts payable (AP) ledgers. The cascading effect of interconnected businesses not paying their bills threatens to topple firms that aren’t following good practices for financial health.
Especially during these times of tight cash, getting control of accounts payable is an essential part of improving overall financial performance. These are four ideas worth considering as you think about your business’s AP:
- Lean into your vendor relationships.
A business’s accounts payable are a byproduct of its relationships. When those relationships are built solely on a commercial exchange, they might not be reliable when something goes wrong. To be strong, vendor relationships need a human connection to go with reliable, consistent performance.
When faced with AP challenges, a business that has fostered good relationships with its vendors can use that to negotiate. The supplier who refills the company’s water cooler may not have much room for price breaks, but it might keep the water coming another month if it trusts the business will honor its debt when the time comes. The same is true for a landlord or a bank. A property manager is more likely to work with a business she feels connected to, rather than automatically issuing penalty charges.
For those who haven’t already established good relationships with their vendors, now is as good a time as any to get started. Letting a vendor know about short-term cash problems and offering to work out a mutually beneficial arrangement is still significantly better than letting the unpaid bill sit unacknowledged.
- Adopt disciplined practices for paying bills regularly on your schedule.
Remarkably few small businesses follow a routine for paying bills. Some pay every bill as soon as it arrives, while others allow them to stack up and only pay once their vendors start to ask questions. Paying early is a good way to improve upon the relationships we talked about above. But it isn’t always a good practice when cash is tight.
Some simple practices can take the chaos out of paying bills:
- Establish days when bills are paid, such as the first and third Wednesdays of each month.
- Verify that the services or goods related to an invoice have been delivered before paying it.
- Having regular days for making payments allows for deliberate choices about when to hold off paying an invoice.
- Examine your payables and eliminate unnecessary expenses.
Every business should conduct a detailed analysis of its outgoing expenses on a regular basis, preferably monthly. A surprising number of businesses needlessly lose cash every month to things like unused subscriptions. Just cutting out small but recurring expenses can have significant long-term benefits.
Understanding the contents of accounts payable from month-to-month also will highlight where the company’s major costs are. For many of the businesses we work with, just taking the time to analyze accounts payable reveals unexpected channels of loss that can be shrunk or closed without harming the core business.
- Do you need internal controls?
Internal controls are policies and procedures designed to protect a company from risk. Their scope goes well beyond financial matters into areas like human resources and corporate governance. But in the finance and accounting realm, they can play an important role in preventing problems like runaway accounts payables.
Internal controls have become an obsession for businesses over a certain size. Publicly traded companies expend enormous resources on developing and enforcing complicated internal control regimes to satisfy their audit requirements. Many mid-sized firms that don’t face public scrutiny adopt elaborate control procedures to prevent fraud and assure the leadership team that it has sufficient command of the company’s resources.
For many small businesses, the notion of internal controls may sound like stuffy bureaucratic terminology that has no place in a lean operation. Simple practices can go a long way toward getting a grip on AP. These are a few examples:
- Keep track of every commitment so surprise invoices never arrive.
- Review bank and credit card statements in detail every month.
- Tie payments to invoices that are verified by people who are responsible for that vendor relationship.
- Set limits on how much individuals can commit the company to spend—for example, by signing a contract—without first getting the approval of management.
- Prevent personal expenses from becoming business expenses.
- Ensure financial duties are performed my multiple people, to prevent fraud and catch mistakes.
Get Control of Accounts Payables and Beyond with Whittaker & Company
Control of accounts payable is just one part of the layered strategy of financial management Whittaker & Company provides to our clients. Is your business struggling to stay on top of a snowballing accounts payable problem? We can help. Give us a call to start a conversation today.
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