You need a consistent flow of cash through your business in order to be successful. Cash flow management involves finding ways to make this a reality, and many of the ideas circle around the money entering your business. When you hear people talk about improving cash flow, they always go on about how to make more money – but that’s only half of the situation.
Cash flow problems often stem from the money leaving your accounts. In simple terms, you’re not in control of your expenses, which leaves you with hardly any money to pay for critical things. The flow of cash dries up regardless of how much money you bring in. Staying with that line of thinking, today’s post will look at ways to improve cash flow by managing Accounts Payable (AP). These genius ideas and techniques can help stem the flow of cash from your business and give you more money to operate with.
#1 Try to extend the payment terms
Accounts Payable (AP) refers to any payments that are yet to come out of your accounts. It normally relates to unpaid invoices when dealing with suppliers or vendors. You’ve acquired services or materials from someone, and they need to be paid. This will usually result in an invoice being drawn up with payment terms stipulating how much you owe and when it’s due.
30 days is the standard payment term for most vendors, but you can try to extend this to 60 days if you negotiate. Some suppliers will be happy to do this – especially if you’re a loyal customer, as they know they’ll get repeat purchases from you. Having 60 days to pay instead of 30 means you can keep cash in your accounts for far longer. This gives you more operating cash to pay for essential business things, while also providing extra time to prepare for when the money eventually leaves your account.
Essentially, extending the payment terms makes it easier for you to plan a budget, and you don’t feel as much of a time crunch. The added time also opens the door for you to bring more cash into your business, which means you can easily pay the vendor by the 60th day without suffering a negative cash flow.
#2 Take advantage of any early payment discounts
If a vendor is unwilling to extend the payment terms, then perhaps you can negotiate for some early payment discounts. Once more, plenty of suppliers/vendors will already establish these discounts for customers. From their perspective, it’s an incentive for customers to pay early, meaning they don’t have to chase up any unpaid invoices that impact their cash flow.
From your perspective, taking advantage of the early payment discount will mean you spend less money. Even if it’s a 5% discount, that’s 5% of the payment left in your accounts to help manage your cash flow. Every little helps – and that small discount can mean you’re able to cover other expenses or get by without dropping into a negative cash flow situation without enough money to pay the bills.
#3 Avoid late payment fees
A lot of the AP management tips center around payment terms and how you can manipulate them to your advantage. Speaking of which, you should be aware that every single vendor will issue fees if you don’t pay on time. Some may even include fees for silly things like not responding to their initial invoice email.
That’s why you must do two things to stay in control of your cash flow:
- Pay on time, every time
- Read the payment terms and conditions
Missing payments is all too easy when you’re busy running a company, but you can streamline AP with procure-to-pay tools that’ll automate the entire process for you. In other words, software ensures you keep track of your payments and meet all invoice requirements before any fees are incurred. You don’t pay any fees, which means you’re not parting with extra cash and can stay in control of your cash flow.
Similarly, reading the T&Cs before agreeing to a service will help you avoid any nasty contracts. You might end up in a contract with loads of potential fees or interest rates that force you to pay more on top of the initial price. If you sign something, there’s no way to get out of it. So, be vigilant and only agree to terms that you’re confident of adhering to.
The key thing to remember is that managing Accounts Payable will help you get a grip on your cash flow. It’s the hidden secret to ensuring a steady flow of cash through your business because it stops you from departing with too much money or not leaving yourself with enough time to pay for things.
