Accounts Payable: Why is this important?

Accounts Payable: Why is this important?

What is Accounts Payable (A/P)?

Accounts Payable (A/P) represents the money a company owes to its suppliers for goods or services purchased on credit.

Why is it important?

Accounts Payable (A/P) is important because it reflects a company’s short-term liquidity obligations and its management of cash flow and supplier relationships.

What is considered best practice for Accounts Payable (A/P)?

While best practices for A/P can vary by industry, business model, and company size in general it is always preferable that A/P policies align with the company’s cash flow management strategy and supplier terms. Ideally you will want a strategy that maintains good supplier relationships and avoids late payment penalties without constraining company liquidity.

What can I do to optimize my Accounts Payable (A/P) strategy?

Optimizing Accounts Payable (A/P) is all about balancing good supplier relationships and avoiding late pay penalties with being able to keep your cash and enhance your liquidity for as long as you can.

Here are some strategies to potentially help achieve this balance:

•      Negotiate Favorable Terms: Engage with suppliers to negotiate mutually beneficial payment terms that are longer and more flexible. This can aid in cash flow management.
•      Prioritize Payments: If cash flow is tight, prioritize payments based on significance of the supplier, the criticality of their goods/services and any potential late fees.
•      Forecast Cash Flow: Regularly forecast your cash flow to anticipate potential liquidity issues, then plan accordingly.
•      Maintain a Cash Reserve: If possible, maintain a reserve of cash for unexpected liquidity constraints.
•      Leverage Electronic Payments: Utilize methods like bank transfers and online auto pay to allow you to schedule payments for the very last day allowable, ensuring timely payments but better cash flow control.

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