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Accounting

Improving cash flow through better payables management

There are several ways in which a business can improve their cash flow situation by optimizing their payables management. Mostly this relates to timing issues – when to pay your suppliers.

Pay invoices on or close to the due date. Supplier terms are typically the only source of interest-free credit your business is going to get, so use it. Accounts payable is like a short-term loan to your business. The exception to this is when it saves your business money to pay multiple invoices with a single cheque – some of the invoices will be paid a little early. The secret is to figure out how much it saves you, and adjust accordingly.

Pay early enough to get the trade discount (if available), but no earlier. Some suppliers offer a 2% discount if paid within 10 days, otherwise within 30 days. Take them up on their offer, even if you need to borrow the cash for the 20 day difference. The discount rate of 2% over such a short period is equivalent to approximately 36% per year! Note that this doesn’t apply if you’re not going to have the money in 30 days anyway, because you’ve got bigger cash flow problems.

Pay invoices when they are due. Save late fees and preserve your business’ good standing with suppliers. Switching to a new supplier will end up costing you more than you’d save by stretching out payables to 60 or 90 days. Again, if you’re not going to have the money in 60 days anyway, you’ve got bigger problems.

Negotiate volume discounts with suppliers. There’s an equilibrium to be struck here because there are costs associated with storing and ordering inventory that will negate any volume discounts if you order too much.