Around 82% of small businesses go under due to cash flow management failure.
Accounts receivable and accounts payable contribute significantly to the state of your firm’s cash flow health. Therefore, you must invest enough time in learning how to handle accounts payable and accounts receivable to avoid crashing and burning.
So, how do you manage accounts payable and receivable? Wonder no more. Dive into this guide to uncover expert tips for managing these two cash flow factors.
What’s Accounts Receivable and Accounts Payable?
Not every business will handle customers that pay on delivery. To keep selling, you need to operate using accounts payable and accounts receivable. But what do each of these terms mean?
1. Accounts Receivable
Accounts receivable (AR) is the amount of money a customer owes you when you offer your goods or service to them on credit.
Let’s say you deliver a product or service to your customer worth $12,000 and agree on payment in 60 days. That $12,000 will go on your books an account receivable.
2. Accounts Payable
Accounts payable (AR) refers to the credit you receive from your suppliers when they serve you their products or services without upfront payment.
In our previous case, if the tables were turned and you were the one receiving the $12,000 worth of goods or services from a supplier on credit, it would be an account payable in your books.
At the end of 60 days, the supplier would expect you to pay them $12,000.
Why Do Accounts Receivable Matter?
Even though AR is a type of debt you extend to your clients, it still goes on your books as an asset and not a liability.
Why is that?
First of all, AR can help you raise more business as clients don’t have to pay you upfront. As long as you can vet the creditworthiness of each client, you stand to potentially grow your revenue by allowing your customers to pay a little later.
Another essential benefit of using AR is that you can use it to resolve cash flow issues.
When you run into cash flow issues, you can sell your invoices to a factoring firm that buys them at a discount.
That way, you turn outstanding revenue into cash to keep operations going.
When it comes time to deal with investors, your AR track record can help such parties determine how much your firm can make. These are sales that you might not have won if you strictly worked with upfront payment.
Can You Find Any Value in Accounts Payable?
It’s possible to see how AR can help you grow your business. But what value is there in incurring debts in the form of AP?
The primary value of operating on AP is that you defer payments and use that money to enhance operations.
As long as you are sure you can meet your AP deadlines, you potentially stand to add more volume to your sales before cash goes out to settle what you owe.
How Do You Manage Accounts Payable and Receivable?
Even though both AR and AP hold potential value for your business, how you manage them is mission-critical.
Sell too much on credit, and your money gets tied up outside. Accrue too many debts, and you risk losing trust with your suppliers should one little thing go wrong.
Let’s dive into some tips to help you better manage AR and AP.
1. Confirm Who Authorizes the Payments
If you don’t confirm the party that’s supposed to sign off on the invoices, you may make some costly mistakes.
For every invoice you generate or receive, you need to assign the signatory correctly. Otherwise, you may end up not paying or seeking payment in time, which can adversely impact other operational areas.
When you assign a signatory for each category of invoices, you can catch irregular spending before it spirals.
Additionally, assigning the responsibility to sign helps avoid invoices going unpaid or uncollected as neglected ones fall through the cracks.
2. Automate the Process
Several technological solutions can help you make handling AR and AP more efficient. These solutions bring benefits that can add value to your operations by orders of magnitude.
Setting payments on a preset schedule is one of these benefits. Through this capability, automation can free more time for you to focus on thornier bottlenecks.
Automating your AR and AP helps you weed out errors, enhancing the efficiency of your system.
3. Simplify, Simplify, Simplify
A more straightforward system is easier to manage. Thus, you can eliminate unnecessary complexity by reducing your number of check runs. Doing a check run twice a month is advisable.
Do you have a cash disbursement ceiling? You should inform the AR team so they can pay the most critical invoices first.
If there are decisions that can make operations more manageable, you should empower your team to work effectively.
For example, if you have vendors who can tolerate longer payment cycles, you can give your team the power to delay paying these vendors first.
4. Combat Fraud
Wherever you have incoming or outgoing cash and/or checks in your firm, there is room for fraud.
In AP, it’s easy for staff to create ‘ghost vendors’ as a means to pay themselves for non-existent work. To avoid this, ensure that any employee who has the authority to sign a check has no power to create a vendor. Furthermore, before staff set up any vendor for payment, the parameters should dictate that they report this their senior.
You can also develop a program for unannounced spot checks on AR and AP to keep all those involved in line.
5. Capture Invoice Data in Small Batches
When you are entering invoice information manually, you are liable to make a mistake if you handle many invoices at a time.
Nip this issue in the bud by empowering your employees to enter invoices in small batches.
Since there are fewer invoices to deal with, errors at the point of data origination will be minimized.
Keep Your Financial Operations Running Smoothly
Accounts receivable and accounts payable are critical for many businesses that don’t operate on upfront payments. While these two operational approaches hold value for your firm, you have to ensure you manage them efficiently. Take time to ask the question, “How do you manage accounts payable and receivable?” That will guide you on the suitable best practices to adopt.
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