Accounts Payable Days* is the number of days, on average, you are taking to pay your suppliers. This number is just as important as Accounts Receivable Days, as it can also have a big impact on your working capital situation.
Have you noticed how it’s so easy for you or a staff member to oil the “squeaky wheel” and pay the supplier who hassles you most for money (sometimes before it’s due)? It’s also easy to ignore potential better terms to be had from suppliers because you get so focused on revenue.
Some small changes to procedures relating to Accounts Payables can pay big dividends in your bank account.
If your business is growing this could be critical cash for funding business growth. We’re not suggesting stringing out suppliers beyond the agreed terms, but we are proposing negotiating better ‘agreed’ terms from suppliers. Paying suppliers too early and wasting credit available could be costing you precious cash flow.
These are eight ways to get the most from your supplier credit terms:
- Systemise paying suppliers: Have a routine and stick to it, be disciplined.
- Do you pay early: Never pay early unless you are offered a discount.
- Credit cards: Use credit cards to maximise interest free days.
- Payment system: Have a system for payments on the due date to ensure you get the benefit of every day’s credit. Don’t just pay everyone on the same day.
- COD’s not on: Don’t pay cash on delivery – ask if an account is available. Most businesses will give an account to another business.
- Make ONE person responsible: Just one person pays suppliers to avoid overpayments.
- Check every invoice: Validate supplier invoices against quotes or purchase orders to ensure you aren’t overpaying for goods or services.
- Good relations: Develop good relations with suppliers to enhance supplier negotiation effectiveness. Know how much business you have done with them to assist with negotiations for better terms and pricing.
|*Accounts Payable Days
This is the number of days, on average, you are taking to pay your suppliers.
Example Accounts Payables $ 135,000
Annual Cost of Goods Sold $ 700,000
Time Period 365 days
135,000 / 700,000 x 365 = 70 days
Look out for our next blog post for more detailed information about each of the Seven Key Numbers and ways to improve them.
If you don’t want to wait for the next blog post and you’re keen to get started improving your Seven Key Numbers right now…