For many SMEs in Singapore, keeping up with payments can feel like juggling too many balls at once. With money going out faster than it comes in, you may find yourself constantly scrambling to pay bills, suppliers, and even employees. If this sounds familiar, the good news is that you don’t need a miracle to improve your cash flow. One of the most effective ways to free up cash and stabilize your business is by managing your accounts payable more effectively.
Accounts payable (AP) represents the money your business owes to suppliers and vendors for goods and services you’ve received but haven’t yet paid for. It’s like the credit you use to buy supplies for your business, with the expectation that you’ll pay it back later.
Effective management of accounts payable is crucial for maintaining a healthy cash flow. If you pay your bills too early, you might run out of cash for other critical expenses like salaries. If you pay too late, you could ruin relationships with suppliers or incur late fees.
Why Managing Accounts Payable Matters
Managing accounts payable is like maintaining the fuel in our car. If we are not mindful, we could run out of gas in the middle of the expressway, causing our business to come to a standstill. Here’s why getting a grip on our accounts payable is so important for our working capital:
- Frees Up Cash for Growth: When we manage our payables well, we ensure that cash isn’t locked up unnecessarily in paying bills too soon. This freed-up cash can be used to invest in growth opportunities or as a buffer for unexpected expenses.
- Improves Supplier Relationships: Paying our suppliers on time helps build strong relationships. This can lead to more favorable terms, discounts, or even negotiate to extend credit periods, all of which are beneficial for our cash flow.
- Avoids Late Fees and Penalties: Mismanaging accounts payable can result in late fees and damaged supplier relationships. These costs, though small individually, can add up and negatively impact our bottom line.
Step-by-Step Guide to Managing Accounts Payable Effectively
Step 1: Organise Accounts Payables
The first step to effective accounts payable management is to get organized. For small businesses, a simple excel spreadsheet or an accounting tool like QuickBooks or Xero can work wonders. List out all your vendors, the amounts owed, due dates, and payment terms. This visibility is the foundation for all subsequent steps.
Step 2: Understand and Negotiate Payment Terms
Payment terms can vary widely from supplier to supplier. Some may offer a 30-day payment window, while others may expect cash on delivery. It’s crucial to understand these terms and negotiate whenever possible. If you have a good track record with a supplier, ask for longer payment terms - say 60 or even 90 days. If your supplier is unwilling to offer credit terms now, ask what is takes to be able to receive credit terms. This gives you something to work towards. You will be surprised just how willing your suppliers are to keep working with you.
Step 3: Prioritise Payments
We always hope to have enough cash to pay all our bills on time, but this isn’t always possible. When cash flow is tight, prioritise payments based on urgency and importance. Salary and rent should always be top of the list. For less critical suppliers, consider asking for an extension or setting up a partial payment plan and be sure to keep to it. The last thing we want is for our suppliers to lose faith in us and decide not to work with us.
Step 4: Take Advantage of Early Payment Discounts But Only If It Makes Sense
Some suppliers offer discounts if you pay early—usually within 10 days of receiving the invoice. While this can be a great way to save money, it’s only worth it if your cash flow allows it. Don’t stretch your finances too thin just to save a few dollars.
Step 5: Automate and Schedule Payments
One of the easiest ways to improve our accounts payable process is to automate it. Most corporate bank accounts allow us to put standing orders for invoice payments. This ensures we will never miss a due date and can help us avoid late fees.
Step 6: Review Payables Regularly
Reviewing our payables regularly helps us to spot patterns in our spending. Are there any vendors we could consolidate? Are we paying too much in late fees? Regular reviews help us spot inefficiencies and address them before they become bigger issues. Last year, we asked one of our suppliers to collate his invoices and only bill us once a month.
Managing accounts payable effectively might seem like a small piece of the puzzle, but it’s a crucial step toward a healthier cash flow and working capital management. By staying organised, negotiating terms, prioritising payments, and using automation, we can free up cash and reduce any unnecessary financial stress.