Continuing from our article on The Eight Levers to Increase Cash Flow, we tackle accounts payable. Most small businesses don’t actively manage their accounts payable to increase cash flow, but there are great opportunities!
The best place to start with a target accounts payable amount is by industry benchmarking. You don’t want to have accounts payable significantly different than your peers. Too high, and you might not be receiving the best terms from your vendors because you “ride” them. Too low means that you’re spending money faster than you need to.
Discounts: Although paying vendors early doesn’t help initial cash flow, the increased profit can be worth it in the long run. Many vendors offer discounts for paying early, with the most popular being some discount for paying within 10 to 15 days. 2% doesn’t sound like much, but if the normal terms are 30 days, then paying 10 to 15 days early for 2% is actually a whopping 37 to 49% annual interest costs! Consider a bank line of credit to be able to take advantage of these discounts.
Working Vendors: It is best to regularly search out new vendors to evaluate pricing and service. Price isn’t the only criteria to choose vendors for sure, but if you have information, you have leverage. Use those other vendors to negotiate better terms with your current supplier. Research your current vendor and know their financial situation. If you represent a large account for them and they enjoy good margins, chances are you can negotiate better terms and/or pricing.
Slow Pay: This strategy sounds offensive to some, but it really is sound business practice. If there are no negative consequences, such as losing discounts, or incurring late charges, wait until the vendor asks. Of course this can have negative repercussions with the relationship, and limit your ability to negotiate other factors, and we’re NOT saying “don’t pay your bills”. Just remember, this isn’t a moral issue, but standard business practice.
If you would like a FREE industry comparison for your business, schedule a no-obligation consultation. We promise, no pressure, just information to help increase your cash flow so that you can have a better business, and a less stressful life!