Managing accounts payable is an important component of cash flow management.
We have a different view on cash flow, as it relates to accounts payable vendors, than most people do. We recommend that your vendors be treated in the same manner as your accounts receivable customers. You should have a friendly relationship with your vendors.
Communicate with your vendors on a regular basis. Be sure to take and/or return their calls within a reasonable period of time. Doing this will help you to build credibility, of which will help your cause should you ever find yourself experiencing a cash flow problem.
If your business does find itself in a tight cash flow situation, delaying or stretching payments to payable vendors can act as an interest free form of financing. But, you will only be able to accomplish this if you have laid the groundwork, as discussed above, and have built an open and mutually respectful relationship.
Stretching payments to vendors, beyond your payment terms, will only work if you have laid the groundwork that we have described above. Doing so without having established a sound relationship can not only hurt your credit, but may also jeopardize your ability to receive product or services.
Should your business experience a situation where cash flow is tight or non-existent, call each vendor and make them aware of your situation, what you are doing to correct the problem, and how long that you estimate being in this position.
Utilizing Payment Plans
Set up payment plans with all who will go along with your plan. It is crucial that you do what you say you are going to do. Therefore, devise a payment plan that is both feasible and can be adhered to.
Send the payment plan in writing, to your vendors for their approval. Ask that they initial and return to you, now you can start putting this aspect of your cash management plan into action.
Once you are on a payment plan, follow through, and only commit to a payment amount that you will be able to meet. Do not over promise, as the moment that you lose your credibility, collection methods may increase, which will affect your ability to receive goods or product.
We cannot stress enough, that without credibility and communication amongst your payable vendors, this will not work and you will need to rely on another action plan. Also, this is not a long term solution, but it will enable you to work on and find a solution to your current cash shortage.
There may be a time where a vendor or several of them may ask that you pay on a COD basis for any new products ordered. I have been in this situation several times, and I agreed to do this, but I also asked that the COD payment be applied to the oldest invoice. This will help both of you, in that on the vendor end, it will improve their accounts receivable aging and the accounts payable aging in your case.
Openness and honesty will go a long way toward cementing a relationship that can help keep you in business, while delivering goods or product to your customers in a timely manner.
The goal is to keep product coming in, which will enable you to keep shipping products to your customers and collecting the receivable.
There are several industries where a payment plan will not work, and a few examples of those are, utilities, leases, insurance, bank loans and employee benefit programs.
That’s not to say that you cannot stretch these somewhat, it will depend on how good your sales skills are. We have stretched all of these examples and it was a case of gaining experience and making mistakes along the way.
While we have had our share of utility shutoffs, canceled insurance policies, and loans being called due, we learn from our mistakes, and believe me, we have!
In summary, if you are going to use accounts payable to effectively provide some relief to your cash flow shortage, you must be creative, honest, an excellent communicator, and a master negotiator.
But, if done effectively, this plan of action may be the difference between staying in business, having lawsuits filed or collection agencies pressuring you for payment.
If you are struggling with cash flow issues, let us use our experience and expertise to help you ease the pressure on both you and your business.