How To Strengthen Working Capital By Leveraging Accounts Payable
In today’s economic climate, businesses are under increasing pressure to do more with less. Do you feel it? Well, let’s talk about it.
This means your business needs a working capital strategy that not only makes it possible to fund the day-to-day trading of the business but to also fund growth, reduce costs, streamline processes, seize new opportunities, and enhance service levels – all equally important, and all very time-consuming and stressful! How can you tackle all of this with the capital that you have?
Have you thought of including accounts payable in your core strategy? It’s actually a popular way to optimize working capital, and you can do it easily with five simple approaches.
1.Improve the Vendor Selection Process
Be an educated buyer! I’m not talking Googling either. You need a solid selection process when you are choosing vendors to do business with. A process that helps you negotiate the most beneficial buying and payment terms. Don’t forget to include key decision makers such as the CFO, VP of Finance, Controllers, etc. Also, look to negotiate longer payment terms with suppliers, (particularly if you are coming from a position of strength) and seek out opportunities to ask for better deals on pricing. Bring out those bartering skills!\
2. Centralize and Streamline the Accounts Payable Process
Accounts payable again! Yes, centralizing your accounts payable process will give you more visibility into your teams operations. This will help you make sure that your staff is following common standards and practices and see how many resources it takes to complete a task.
Whether you are environmentally inclined or not, you should also move towards paperless processing with as much automation as possible. The more you can automate any accounts payable tasks, the better. Automate all kinds of things, like validating and accepting invoices, tracking goods received, scanning invoices, and paying invoices on time. We live in the 21st century after all!
A side benefit of using any type of automated system is being able to negotiate better payment terms, rebates, and discounts with your vendors.
3. Create Accurate Supplier Master Data Records
Okay, you’ve negotiated terms with suppliers, did you capture this information electronically? Well you should’ve! And should start doing it! All data should be collected and inputted accurately – mistakes can be expensive and could result in disruption to supply. The results may even prevent you from taking advantage of discounts. No one wants to miss a discount.
Make sure to include basically everything you can, like all relevant contact information, any service level agreements that are in place, product and service details, delivery timelines and deadlines, payment terms, supplier responsibilities, and any regulatory compliance information that may be relevant. (Or just electronically record everything? No, those are the key things to remember, all I’m saying is that it’s better to delete than to be missing something important!)
4. Regularly Review Contractual Data
Didn’t you learn to proofread in school? Think of this like that, because while inaccurate and fraudulent vendor billing practices do happen, they can be detrimental to your business. Would you be able to prevent an invoice from being paid twice by mistake or an overpayment being made with your current accounts payable system?
A good procurement and invoicing platform will prevent these problems from happening, but you should also ensure that you take the time to regularly review your vendors. Review any contract information, whether your vendors are continuing to perform according to any SLAs, and whether they are acting in compliance with regulations. You could spot something before it becomes an huge issue!
Quick tip: You might also want to consider adding contract clauses that pass accountability for penalties or fines to vendors should they be underperforming in some way. Then they will hope they reviewed, and you’ll be glad you did!
6. Improve The Procurement Process
So we don’t neglect anyone, of course some businesses work with hundreds of different suppliers, which makes it a challenge to reconcile every invoice that is received with its corresponding purchase order. We get that, but this can result in failures in managing accounts payable which can, in turn, result in difficulties managing cash flows and forecasts, which as we know are important indicators of success.
You can be lax with your golf game if you want, but lax procurement processes can introduce risks, such as trading with unapproved vendors or overspending. Streamline your procurement system to prevent maverick purchases, and ensure the business always deals with pre-approved suppliers. We always want to reconcile and pay invoices in a more timely manner, don’t we?
If that went all over your head, reread it. But, also, to summarize, you can reduce the process complexity, minimize some risks connected with routine transaction processing, and enhance supplier compliance by simply improving the accounts payable process and creating clear management and monitoring processes. Lots of processes to spiff up, but through this, your business will experience enhanced liquidity and bottom line performance. So, go for it!