Accounts payable are a crucial part of a company's cash flow cycle and as much effort should be directed into managing this area as is directed into managing inventories and accounts receivable.
To achieve this, management must control and manage the accounts payable system in order to maximise the company's use of its cash. The following rules give a good guide as to the sort of areas management should direct their attention to in controlling their accounts payable.
1. Evaluate Cash Flows
Aim to match inflows of cash with outflows. If it takes 90 days to collect accounts receivable it is destructive to pay accounts on 30 days. Management should monitor the time it takes to purchase goods, manufacture, sell and receive payment and then use this benchmark as a goal to improve on.
2. Set Goals for Accounts Payable
Avoid situations where the accounts payable clerk decides which accounts will be paid. Bill payments should be planned and should be in line with cash budgets, yet timely enough to maintain good customer relations with suppliers.
3. Set Payment Priorities
Be clear about what accounts must be paid and then set a classification of accounts that can be delayed when flexibility is required.
4. Negotiate Payment Terms
Communicate repayment terms with suppliers at the time of purchase, not when the account is overdue for payment.
5. Keep Good Records
Accounts payable records should be well maintained so that it is possible to reconcile aging by reference to order documents and delivery documents that are kept batched with invoice documents.
6. Recognise Early Warning Signs
Management should always look for the early warning signs of difficulties in accounts payable. They are an increasing in aging of accounts payable, incurring late payment penalties, system disorganisation, overdue taxes and creditor complaints.
By following these rules management should be able to monitor and manage their business cash flows to take greatest advantage of their businesses cash resources. By adhering to this process management will be better equipped to recognise a deteriorating financial position and therefore react quicker if the situation arises.
Macks Advisory is a firm that practices exclusively in the areas of insolvency and business reconstruction and members with queries are invited to contact Peter Macks on 08 8231 3323 or [email protected]