When managing your business finances, one of the critical areas you’ll need to keep a close eye on is your accounts payable. In short, this refers to the money your company owes suppliers for goods or services delivered (but not yet paid for).
While accounts payable is technically a liability on your balance sheet, it’s important to remember that this money is owed for goods or services that have already been received. As such, it’s crucial to manage it in a way that doesn’t cripple your cash flow.
Different ways to do this include offering discounts for early payment, extending payment terms, and using accounts payable financing. Here is a breakdown of what we mean.
Discounts: Offering a discount for early payment is a common way to encourage suppliers to be paid promptly. This can help to improve cash flow and keep accounts payable from becoming too large.
Extended Payment Terms: Extending the payment terms is another way to manage accounts payable. This can give you more time to pay the bill but also increase the interest owed.
Accounts Payable Financing: This is a type of short-term loan that allows companies to borrow against their accounts payable. This can be a helpful tool for managing cash flow and improving liquidity.
Accounts payable is divided into two types: trade payables and accruals. Trade payables are amounts owed for goods or services delivered to the company but not yet paid for. Accruals are amounts owed for goods or services that have been received but not yet invoiced.
When a company’s accounts payable increase, it can indicate that the company is having difficulty paying its bills. This can be a red flag for investors and creditors.
If you’re interested in starting to manage your accounts payable, there are a few things you can do to get started:
- Talk to your accountant or financial advisor to find out which method would be best for your business.
- Implement the chosen method and start tracking your progress.
- Monitor your accounts payable balance to ensure that monthly days in AP remain consistent.
- Make adjustments to your approach as necessary.
Managing accounts payable can be a helpful way to improve cash flow and avoid financial difficulties. By getting started with a management plan, you can ensure that your bills are paid on time and keep your business running smoothly.
Accounts payable is an important part of a company’s financials. It is important to manage this liability carefully to avoid financial distress. There are a few different ways to manage it, including discounts, extended payment terms, and accounts payable financing. Each method has its own set of benefits that can be helpful in different situations. Call Consult Your CFO today to get started!