Managing Accounts Receivable and Accounts Payable

For any small business, keeping a close eye on accounts payable and accounts receivable can be a challenging process. However, this is one key to helping your business run optimally, especially if your company handles hundreds or thousands of transactions on a regular basis. That’s because the gap between “what you owe” and “what you’re owed” helps to determine your cash flow, and the more cash your business has, the easier things are for you as the business owner.

In order to manage your accounts payable (AP) and accounts receivable (AR) more effectively, establish your credit terms upfront. This lets your customers know exactly how much time they have to make payments. For your best customers, the ones with good credit ratings or with a track record of paying on time, you can offer them more flexible payment terms. For other customers, you may want to limit payment terms to 15-30 days. Any more than that, and it could be hard to collect later.

And, in terms of accounts payable, it’s good to get into the habit of paying suppliers as soon as items arrive. You may even be able to get payment discounts for paying quicker. Letting payments pile up is a dangerous strategy as it could lead to a cash flow squeeze later.

Also, think about ways to streamline your transaction cycles. The shorter the transaction cycle, the more streamlined your workflow. To avoid bottlenecks and other difficulties, establish shorter receivables timelines so that you can quickly deal with your accounts payable. Get departments into the habit of issuing invoices, purchase orders and other documentation on designated days of the week or month to create a routine you can work with.

Next, you need to make sure that the folks who handle accounts payable are communicating regularly with the folks who handle accounts receivable. This may be difficult when you’re trying to keep on top of a large volume of transactions, but is absolutely critical if you want to manage cash flow effectively. The left hand, as they say, needs to know what the right hand is doing. For example, if there’s a spike in consumer demand, the AR team can signal the AP team to order more items and be ready for a surge in activity.

In addition, keep a careful eye on accounts that are long past due. You want to make sure that not too many of your accounts are aging. This means looking at old accounts on a regular basis to make sure that everything is being taken care of on schedule. Along those lines, set up a policy indicating the maximum period it should take to clear a customer’s account.

Finally, take advantage of automation to track everything. This speeds up the process of creating and managing invoices, drawing up shipping orders, tracking financial statements and managing the flow of all documentation. This can be a logistical nightmare if it’s all handled manually. But if it’s automated, you have a real-time view at how the business is doing. Using Spire, you have a window into real-time financial flows. And it’s also easier to assemble documentation and reports, as well as flag delinquent accounts and bottlenecks within the business.

So, remember, to optimize cash flow for the business, you need to manage accounts receivable and accounts payable. When they are working in harmony, your company will experience improved financial performance and you will have a big-picture view of how the company is faring.