Ideas To Manage Your Vendors and Accounts Payable to Increase Cash Flow
By Jon Orr, Managing Director, Optimas Financial & Accounting Solutions
We often discuss the best ways to uncover more cash to grow your business – from how to gather your Accounts Receivables more reliably to ways to save money on your inventory.
In this article, let’s look at a third method: Accounts Payable. As we’ll find, by working with vendors to land better prices and payment terms, your business can realize greater cash flow. For more information, click here to see 4 Steps to Increase Cash Through Vendor and Accounts Payable Management.
Brief Recap on Working Capital
Remember that working capital is calculated as current assets (cash, accounts receivable, and inventory) minus current liabilities (accounts payable). Many business owners are surprised at how much cash they free up when they effectively manage these components of their working capital.
How to Monitor Vendor and Accounts Payable Management
We’ve introduced Key Performance Indicators (KPIs) for both Accounts Receivable and inventory. Now let’s see which KPIs are useful when tweaking Accounts Payable.
The Accounts Payable Turnover Ratio measures the rate at which Accounts Payable are being paid on an annual basis:
Cost of Goods Sold / Accounts Payable = Accounts Payable Turnover Ratio
For example, an Accounts Payable Turnover Ratio of 12.04 means that the average dollar volume of Accounts Payable are paid about 12 times during the year. By decreasing your Accounts Payable Turnover Ratio, you are essentially borrowing more from your vendors, which increases the amount of cash available to your business.
The other KPI for managing this aspect of working capital is the Days Payable Outstanding Ratio:
360 / Accounts Payable Turnover Ratio = Days Payable Outstanding Ratio
This KPI determines the average number of days it takes a company to pay its Accounts Payable. A Days Payable Outstanding Ratio of 30 means you take 30 days on average to pay your bills. When you increase the time it takes to pay your vendors, you boost your accounts payable balance, which means more cash on hand for your business.
Let the Experts Demystify Working Capital – and Find You More Cash
Part of skillful business operation involves the ability to take a second – and third – look at all aspects of your financials. Managing working capital with KPIs is part of this. Financial service advisors are experts in the finer points of working capital and all elements that make up successful financial management.
At Optimas Financial & Accounting Solutions, we are these experts. We help our clients manage their vendors and reach ideal payment terms for their industry and particular business – and we can help you, too.
Call us at 630-780-1042 or email email@example.com for more information – and get started on the path to more cash today
About Optimas Financial & Accounting Solutions
Optimas Financial & Accounting Solutions’ (www.optimasllc.com) mission is to give business leaders the timely, accurate financial and operating information they need to manage and grow their business. Optimas provides outsourced accounting departments and CFO services to small businesses. Our clients gain access to resources previously available only to large businesses, all at a cost that fits a small business’ budget. From bookkeeping to CFO services, whether the need is one hour a week or every day of the week, our clients are growing and reaching their strategic goals with the help of Optimas.
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