As stated by Rogers, the author of Entrepreneurial Finance : “For any business, depending on the entrepreneur’s gender, positive cash flow is King or Queen!”(Rogers, 2020). Positive cash flow is imperative for any business to not only succeed but to stay afloat. Having cash on hand allows entrepreneurs to purchase necessary materials, pay bills and most important pay their employees. Even more importantly, cash allows businesses to repay debts and grow their business. There are various forms of cash flow, cash flow management, as well as cash flow ledgers and projections. As with any other business component, it is helpful to have goals in place and be proactive concerning each matter. The accounts payable system is no exception.
It is common for business owners to try and collect their receivables quickly. Simultaneously, owners may delay in paying their outstanding bills all while trying not to put their partnership with suppliers at risk. However, this practice of delaying payables is not always good or beneficial to owners. Which brings up an important question, as mentioned by Rogers in the reading. If you have cash on hand or can borrow at low rates, should you take discounts? Jay Goltz, the author of The Street Smart Entrepreneur, replied Yes (Rogers, 2020). A recent Forbes article shed light on this sentiment with a word of caution. Forbes Author Payson Johnston stated, “When you have a slow-paying customer and you want to offer incentives to entice them to pay sooner, offering a discount may be a good idea to get cash faster. Be careful with how you structure your offer — you do not want to discount too much because this could have an impact on future pricing discussions” (Johnston, 2020). So, as an entrepreneur how can one best go about managing their accounts payable? Like many other business questions, the answer can be found in the numbers.
A business can determine if their accounts payable are working or failing by analyzing the accounts payable turnover ratio and comparing it with the industry average. This ratio can help a business find out the average number of days it takes them to pay their bills (Rogers, 2020). The equation used to find this information would be calculated as seen below:
- COGS (cost of goods sold) /365 days= average daily costs
- Accounts payable/ average daily costs= Number of days it takes to pay
Upon reviewing the previously mentioned ratios, a business can see if their accounts payable days are meeting their target or needs improvement. If improvement is needed, there are several ways this could be done.
One way to improve accounts payable days is by negotiating better payment terms, such as net 45 or net 60, instead of net 30. Another approach could be communicating with the company suppliers. If a good working relationship is established with the supplier and payments are made regularly then entrepreneurs can usually avoid paying late charges by contacting owners in advance about a late payment or need for payment extension. Lastly, investing in a good accounts payable system can help with being organized and keeping track of details like an aging bill (Rogers, 2020). Listed in Rogers book are even more great recommendations on improving accounts payable days that have been provided by professionals.
Each business will have their own methods and varying levels of growth needed as it pertains to managing their accounts payable. It is important for entrepreneurs to keep their finger on the pulse of this matter as with any other business component. Having proper systems and people in place can be helpful in ensuring the reputation and future of the business will never be at risk.
Hyatt, A. (2016). Crowd start: The ultimate guide to a powerful & profitable crowdfunding campaign. New York: Hunter Cat Press.
Johnston, P. (2020, May 27). Council Post: Six Tips To Get Outstanding Invoices Paid During A Crisis. Retrieved August 25, 2020, from https://www.forbes.com/sites/forbesbusinesscouncil/2020/05/27/six-tips-to-get-outstanding-invoices-paid-during-a-crisis/
Rogers, S. (2020). Entrepreneurial finance: Finance and business strategies for the serious entrepreneur (Third ed.). United States: Mcgraw-Hill Education.