While it may be fairly evident from a profitability standpoint that businesses need to manage their accounts receivable carefully and in a timely manner, it’s less obvious how good management of accounts payable can benefit a business’ bottom line. Many organizations naturally see the association between profitability and revenue and miss the more subtle association with expenses.
How Can Expenses Directly Impact Your Business’ Profitability?
For starters, proper management of your expenses will help preserve your relationships with your vendors and partners. You chose your vendors for a reason: they supply what you need at a price you can afford. If you’re chronically late paying these vendors, they may head for the exits, leaving you to find more expensive and/or less reliable companies. Additionally, by vowing to remain current on bills, you’ll earn your vendors’ goodwill and induce them to be more helpful during (hopefully rare) times when you do have to be a bit late on a payment.
Secondly, staying current with your accounts payable will save you money directly by eliminating interest and late fees, which can add up to a significant bite from your bottom line. Finally, paying on time helps preserve your credit rating, which boosts your company’s financial health significantly by giving you access to the best possible credit and repayment terms.
Challenging the Conventional Wisdom of Not Paying Early
Many companies are set up to take advantage of the conventional wisdom that the time to pay a bill is on its precise due date and not a moment before. While there is some wisdom on this – the longer you can hold onto cash, the more you can make it work for you – you may be missing some early payment opportunities, such as discounts for paying early that many vendors offer. It’s worth taking a look at all your invoices and seeing if there are any financial benefits to reap by paying early if your cash flow allows it.
Changing the Way You Manage Accounts Payable
It may be time to take a look at your established AP methods to determine if there are ways you can change them to your advantage. Many companies find it helpful to reexamine the prioritization of their payables. For example, when you’re in a tight spot financially, it can help to focus on payments due today, those that are past due, and those that have the highest penalties or interest rates for late payment.
There also may be value in automating more processes in your accounts payable process to avoid making human errors. As your business grows, chances are you’ll make relationships with more vendors (all with their own payment terms and procedures), and keeping this in workers’ mental vaults will get more difficult. An automation solution can help prioritize your accounts payable so you’re making the payments that make the most sense first. Automation will also help you cut down on manual work, leaving employees free to engage in more revenue-generating activities.
To better optimize your accounts payable procedures, consult with a professional. DOAAR is a small business bookkeeping, tax, and consulting services firm, with an additional focus on its clients’ personal finances. Specializing in bookkeeping, controller, and CFO services, DOAAR’s offering spans daily accounting, month-end close, complex financial modeling, and oversight. From execution to analysis and strategy, DOAAR provides clients with a powerful and fully integrated back-office accounting solution.
We have locations throughout California and the rest of the U.S. Visit our website for more information or to contact us.