Optimising Cash Flow with Accounts Payable: Tips for Small Businesses

Posted on Oct 25, 2023 at 01:10 AM

Welcome to the world of accounts payable, a vital aspect of modern financial management! Imagine tracking and managing your organisation's outstanding invoices and payments to suppliers and creditors. 

You’re probably wondering what accounts payable are and how to pay them. 

In this article, we’ll explore how you can optimise cash flow in your company using accounts payable.

What are accounts payable?

Accounts payable AP is a liability account that records the cash a business pays back to a vendor/supplier after buying goods and services on credit. 

This is an amount that a company owes its creditors within some time frame and includes unpaid invoices and bills recorded on a balance sheet. This balance sheet indicates the amount of money that can be used in paying accounts payable and is very instrumental in determining the working capital requirements, cash flow level and general financial performance of a company’s economy.

What is the difference between accounts receivable and accounts payable?

The term accounts receivable represents the debts customers owe on the provision of services or purchases they still haven’t paid. Accounts payable AP is the amount of payments due from a company by its suppliers and is expected to be paid in some period. 

On the other hand, the balance sheet highlights the funds available for clearing out the accounts receivable/payable, working capital level, cash inflows and invariably the performance of a corporate entity.

How to optimise cash flow with accounts payable?

The key to cash flow optimisation lies in effectively managing accounts payable. A company needs to set up proper procedures and policies for invoicing, processing and payment of supplier bills.

You can also hire an accounts payable professional to manage your accounts payable or join the accounts payable course. The professional will help you avoid any late payment charges and penalties by ensuring the timely processing of invoices.

Also, having inventory management software like an accounting information system will help you track your inventory levels and avoid overstocking or understocking.

There are many ways to optimise cash flow with accounts payable. You can adopt several strategies to manage your supplier bills, including:

• Ensure that the payment terms are clearly stated in all contracts and agreements.

• Setting up a system for proper invoicing, processing and payment of supplier bills and liabilities.

• Inventory management software will help you track your inventory levels and avoid overstocking or understocking.

• Avoid “pay as you go” arrangements with suppliers and, instead, set up credit lines that allow you to purchase materials before payment.

• Setting up an accounts payable policy that includes due dates for all supplier bills, proper documentation and review of invoices.

• Automation of accounting processes by following the current trends in finance, using software to automate the former manual data entry process of transactions or track the income vs costs...

Accounts payable: a guide for small businesses

Many experienced companies already know and use accounts payables in their accounting department. However, if you're new to dealing with vendors and suppliers and want to learn how to Maximise profitability through cost control in your firm, then accounts payable is probably the best choice.

Have you ever seen an old ledger book that your dad used to keep track of the expenses and financial obligations of the family? Accounts payable is just like that; it's a balance sheet that automates the documentation of what you owe and should have.

Why is this important?

An account payable helps create an accurate estimate of the credits currently owned by the company and the debt it owes. An increase in funds payable suggests that a company has purchased more products and services than it can or will pay for. And just like that, reports payable balance can indicate a company's success in the financial division.

Accounts payable: a short guide

Now that we know how vital accounts payable are in representing financial statements, let's dive into the hands-on examples:

Suppose you're a fresh graduate wanting to build a successful career in accounting, and you're responsible for tracking down the accounts payable of your company. How do you do this?

First, you need to examine the company’s financial statements. Accounts payable are generally listed under assets on most balance sheets, making the assets section of your company’s financial statements a good starting point for more information.

You're in luck if you find accounts payable listed as an asset.

Afterwards, go into the company’s general ledger to determine the amount of money handed to suppliers. The second option is to check the balance sheet of your company’s financial statement.

Then, you'll want to look at the amount of cash paid out to determine how much money is still owed.

Once you have this number, subtract it from your company's total assets and voila! You've got your answer.

Compelling accounts payable management not only ensures strong business relationships with vendors but also contributes to maintaining the financial health and stability of the organisation. This is why every company should invest in it today!