As a founder, maintaining sufficient cash reserves is essential to keeping your business running smoothly. Without enough cash on hand, you risk being unable to cover your expenses through accounts payable, which could result in missed payments to suppliers, employees, or other essential business partners.
To ensure you have enough cash, you need to prioritize cash flow management and an effective account payable process. This means regularly monitoring your cash inflows and outflows and making strategic decisions about how to allocate your resources. For example, you may need to cut back on non-essential expenses, negotiate better terms with suppliers, or accelerate your invoicing and collections process.
How does AP Impact Cash Flows?
The relationship between accounts payable and cash flow can be a bit counterintuitive. An increase in accounts payable can lead to a positive cash flow for a company, at least from an accounting perspective. This is because accounts payable is an accounting term that represents the amount of money that a company owes to its suppliers for goods or services that have been received but not yet paid for.
When a company receives goods or services from a supplier, it typically doesn’t pay for them right away. Instead, it will receive an invoice from the supplier with payment terms that might give the company 30, 60, or 90 days to pay. During this time, the company has not yet spent any cash, but it does owe the supplier money.
As a result, an increase in accounts payable is an increase in the amount of cash that a company has on hand, at least until the payment is made. However, until the accounts payable process is completed and the payment is made, the picture can be disrupted.
It’s important to note that while an increase in AP may be good for a company’s cash flow in the short term, it’s not a sustainable long-term strategy. A company that consistently relies on accounts payable to maintain positive cash flow may eventually run into trouble if it can’t pay its bills on time or if its suppliers become reluctant to extend credit.
Challenges In AP
According to industry research, the three most inefficient finance processes tend to be within the Accounts Payable function, specifically related to purchase orders, invoice processing, and invoice approval.
Purchase orders are an essential part of the procurement process, but they can be time-consuming and prone to errors. When a purchase order is generated, it needs to be reviewed, approved and matched to the corresponding invoice and delivery documentation. This can be a cumbersome process, particularly for larger organizations with a high volume of purchase orders.
Similarly, invoice processing can be inefficient due to manual data entry and paper-based systems. It’s not uncommon for invoices to be lost or misplaced, which can result in delayed payments and frustrated suppliers.
Finally, invoice approval is often a bottleneck in the Accounts Payable process. Invoices may need to be reviewed and approved by multiple stakeholders within an organization, which can cause delays and create a lack of visibility into the status of payments.
To improve the efficiency of these processes, companies may consider implementing automation and digitization tools, such as electronic purchase order systems, invoice scanning and OCR technology, and automated invoice approval workflows. These solutions can help streamline the Accounts Payable process, reduce errors, and improve visibility into payment status.
Accounts Payable Process Improvement Step-Guide
Improving the accounts payable process is essential for companies looking to streamline their financial operations and improve their bottom line. Automation is one of the key strategies for improving the efficiency of the accounts payable process. Here are six steps companies can take to streamline their accounts payable process and leverage automation to improve efficiency:
- Implement Electronic Purchase Order Systems
Electronic purchase order (ePO) systems can help streamline the purchase order process by eliminating the need for manual data entry and paper-based systems. ePOs can reduce processing times, eliminate errors, and provide greater visibility into the status of purchase orders.
- Leverage OCR Technology for Invoice Processing
Optical character recognition (OCR) technology can be used to extract data from invoices and automatically input it into accounting systems. This reduces manual data entry and improves accuracy.
- Implement Automated Invoice Approval Workflows
Automated invoice approval workflows can help reduce processing times and eliminate bottlenecks in the approval process. Approval workflows can be configured to automatically route invoices to the appropriate stakeholders for review and approval, reducing the need for manual intervention.
- Use Automated Payment Systems
Automated payment systems can help streamline the payment process by reducing the need for manual check printing and processing. Automated payments can also reduce errors and improve cash flow management.
- Implement Supplier Portals
Supplier portals provide suppliers with a self-service portal for submitting invoices and tracking payment status. This can help reduce the burden on accounts payable teams and provide greater visibility into the status of payments.
- Analyze Accounts Payable Data
By analyzing accounts payable data, companies can identify areas for improvement and optimize their accounts payable process. Data analysis can help identify inefficiencies, track key performance indicators, and identify opportunities for automation and process improvement.
People struggle to get their businesses up and running so that they can refrain from firing their loyal staff in difficult times. But the times have changed and the business environment is more challenging than ever. This is a period when effective cash flow management is crucial for business owners to make informed financial decisions. By having a clear understanding of their projected net balances, businesses can plan and budget for future expenses such as hiring, marketing campaigns, geographic expansions, and other initiatives.
Being able to accurately project cash flow allows businesses to allocate resources effectively, make strategic investments, and avoid financial pitfalls. With proper cash flow management, business owners can ensure that they have the necessary funds to meet their financial obligations, invest in growth opportunities, and ultimately achieve their long-term goals. By taking a proactive approach to cash flow management, business owners can make confident financial decisions that set them up for success in the future.