How does accounts payable affect cash flow - ProSpend

Making sure your business is in great financial health can be quite a daunting task. There are a lot of factors you need to consider so you can make better-informed decisions. While profit is one of the crucial KPIs you need to monitor, cash flow and accounts payable are equally important.

But what exactly is Accounts Payable (AP)? AP refers to short-term obligations a business owes its suppliers or vendors that have not yet been paid. While often overlooked, AP plays a crucial role in a business's financial health. Cash flow, on the other hand, is the movement of money into and out of a business. This flow is essential for your business operations and growth.

How does accounts payable affect cash flow? AP and cash flow are intrinsically linked, which is why it’s important to understand exactly how the two interact with each other.

Positive Impacts of Accounts Payable on Cash Flow

Deferred Payments Done the Right Way

Deferring payments to vendors temporarily can increase your business's cash on hand. Doing so buys you time to manage various crises such as short-term cash shortages. However, it's important to balance this strategy with maintaining good relationships with suppliers and avoiding late payment penalties.

Let’s take a hypothetical small business experiencing a decline in sales due to seasonal fluctuations as an example. They may consider delaying payments to vendors to maintain adequate cash reserves. However, they need to carefully manage their AP, so that they can avoid unnecessary expenses in the form of penalties and ensure its continued operations.

Great Vendor Relationships Pay Dividends

Building a good relationship with suppliers has a lot of advantages. Some suppliers may offer a discount ranging from 1-5% as an incentive for early payments. This arrangement benefits both you and your suppliers. You get to enjoy cost savings while they receive their payment early, improving their cash flow.

Additionally, building strong relationships with suppliers can give you access to more flexible payment terms. Suppliers may offer you various perks such as extended payment periods or higher credit limits.

Negative Impacts of Accounts Payable on Cash Flow

Supplier Disruptions

Accounts payable challenges and supplier disruptions are closely intertwined. When businesses fail to meet AP obligations, they end up straining their relationships with suppliers. This can lead to disruptions in the supply chain, therefore delaying production and increasing costs.

Cash Flow Constraints

A lack of sufficient cash flow can constrain your business's ability to pay suppliers on time. This can potentially lead to delayed payments, damaged supplier relationships, and disruptions in the supply chain. With high AP balances, your business's ability to invest in growth, pay dividends, or meet other financial obligations may be limited.

Increased Costs

Late payments can lead to various problems including interest charges and penalties. These costs can erode a business's profitability and negatively impact its cash flow. Worst of all, paying late can strain your relationships with suppliers.

Strategies for Managing Accounts Payable

1. Automate Your Payment Processes

Streamlining and automating your payment processes helps you minimise errors, delays, and labour costs. By implementing automated accounts payable software, you can gain a more comprehensive view of both your incoming revenue and outgoing expenses. This improved visibility empowers you to make more accurate forecasts and maintain a healthier cash flow.

A critical component of effective cash flow management is having a clear understanding of how much petty cash is available to you at any given time. An AP automation software provides the necessary tools to monitor your cash inflows and outflows, empowering you to proactively address any cash flow challenges that may come along your way.

2. Establish and Nurture Vendor Relationships

Building strong relationships with vendors can help businesses negotiate favourable payment terms and resolve disputes more efficiently. Here are some proven ways to establish and nurture positive relationships with your vendors:

• Always maintain clear, open, and honest lines of communication with your vendors. Doing so keeps everyone on the same page and inspires loyalty.
• Schedule regular meetings or calls to discuss updates, address concerns, and review performance.
• Make sure to pay invoices on the agreed-upon time to maintain a positive reputation among your suppliers and avoid damaging relationships. To ensure on-time payments, consider automating your payment processes.

3. Cash Flow Forecasting

Accurate cash flow forecasting can help you anticipate and manage AP-related challenges. By understanding future cash inflows and outflows, you can make better-informed decisions about your payment accounts payable obligations.

You can get a forecast of your cash flow by monitoring the money that comes in and goes out of your business. Consider automating this process so you can keep track of your cash inflows and outflows effectively and efficiently. Automating your cash flow management gives you access to historical data, industry trends, and customer payment patterns. Backed with all this data, you can gain a complete overview of your financial health.

Better AP Starts With Automation

Improving your business's cash flow always starts with better management of accounts payable. By effectively managing AP, your business stands to improve financial health, maintain strong supplier relationships, and seize growth opportunities. To accomplish this, it's crucial to ensure timely payments to avoid added costs and implement strategies that optimise your AP processes.

Take advantage of automation software to better manage your accounts payable, improve the accuracy of your reports, and take charge of your business’s financial health.