Accounts payable is what you owe to your suppliers.
Accounts Receivable is what you are owed by your customers.
As a business owner, you cannot afford to let either of these get out of control.
Managing accounts payable and accounts receivable is essential to any business. You need to be able to track what you owe a supplier, what you have sold, and what your customer owes you. There are varying degrees of complexity that come into play, with businesses having different payments terms for preferred customers and suppliers, milestone payments with conditions, distributor and other agreements governing the date due and amount of payments.
Managing Accounts receivable (Debtors)
Many businesses now solve the issue of managing accounts receivable by operating on a pay on delivery (C.O.D) basis, or even full payment or a deposit on order.
The Accounts Receivable (what you are owed) function in a business, are responsible for keeping track of money coming in and money going out of your business.
Ideally you want to receive monies from your sales BEFORE you pay out monies to your suppliers. This keeps your cashflow and solvency healthy.
To assist your business with efficient collection of money from your customers:
Establish customer credit policies
You want to try and avoid having ‘bad debts’ i.e. unpaid and uncollectable debts. Communication and relationship are everything.
You can draft a policy that rewards customers for paying early by offering a discount or extra service or goods.
You can reward customers who have been with you for a longer period of time with better payment terms.
Shorten transaction cycles
Make sure you send out sales Invoices as soon as the sale occurs, as opposed to sending them out a week later.
Keep an eye on the timeliness of jobs being completed and paid for to see if there are any bottlenecks that needs attending to.
Work on having great communication
Balancing accounts payable and accounts receivable is not easy.
You need to make sure you are getting useful information about your business from those working in your business. You need to make sure your team is working together.
If you have a huge sales demand, your receivables department can signal that more supplier orders need to be made.
If times are tight the reverse can apply.
Stay on top of aging accounts
You should have accurate recording of all sales and be looking at your aged debtors reporting weekly.
You need a collections escalation process that is ‘fit for purpose.’ That means keep it simple but effective for your business.
You should be communicating with your clients and issuing statements as required.
You need to act on any ‘old’ unpaid accounts IMMEDIATELY. This makes your customer aware that you have systems, and you care about the goods and services you provide them being a high quality, but you also want to be paid on a timely basis.
To assist your business with efficient accounts payable management:
Create Supplier trading terms where you can
Email new suppliers giving introducing your business and requesting them to email supplier invoices to a central ‘accounts email address.
Negotiate terms with suppliers where possible.
Transaction cycles and communication
As stated above, you do not want your business to be paying its accounts payable before it receives money from customers. Otherwise, you will find it difficult to maintain positive cashflow.
You want to keep a close eye on aging supplier payments. You want to make sure you maintain good relationship with all your suppliers because they are important for the efficient running of your business. Covid revealed just how difficult it is if something happens to your supply lines that was unexpected. It can be difficult to source new suppliers.
Use automation to track your payables and receivables
If you are still using a SOLD stamp, or creating sales orders by hand, it is definitely time to improve your processes.
Using a software program such as Xero, as EDGE SME does, it is easy to learn how to do quotes for your customers and then issue a Sales Invoice.
Tracking accounts receivables and payables involves the creation of quotes, invoices, receipts, shipping orders, purchase orders, financial statements, and other documentation. It is a painstaking process and one that is even more cumbersome if even a single document slips under the radar. Using accounts payable software to automate all those transactions in
real-time allows for the quick compilation of information needed for financial statements and can help you get useful data quickly, to help you make better business decisions.
At EDGE SME Financial Management Services we would love to assist your business with managing your debtors and creditors.
