Controlling A/R and A/P

Receivables are basically paper if they haven’t been turned into cash. In addition, any company needs to keep tight control on its outstanding invoices to get an accurate picture of the receivables situation and take steps to improve the turnover of those accounts. On the other hand, among the most important concepts in terms of managing cash flow is working your accounts payable, since one of the ways to improve cash flow is to decrease the speed in which you pay your payables.

Speeding payment

Here are a few key steps that can help you turn invoices over more quickly:

• Regularly conduct an A/R aging—Rank your report by the invoice date, not the statement date. Aging gives you a better handle on how long accounts are overdue and on the outstanding dollar amount. of your company's receivables Regularly Reconcile your accounts receivable ledger with the general ledger.
• Offer discounts for prompt payment—Be sure to keep tabs on the customers that use the incentive, as continuing to give discounts to customers whose payments miss deadlines hurts cash flow and the bottom line.
• Give customers a credit rating—Distribute those ratings to your sales, customer service and data processing people.
• Train your sales force to accelerate collections—You may even want to consider giving your sales team the leeway to reduce late fees or past-due interest charges in exchange for payment on the spot.

Controlling A/P

It’s no secret that one of the ways to improve cash flow is to decrease the speed in which you pay your payables. But you need to be careful not to overstep your bounds with vendors and suppliers when doing it. And different types of payables require a different approach.

When it comes to paying basic, recurring payables, like utilities, phone, etc., it’s not hard to figure out the last possible date to pay without incurring a costly penalty or being disconnected. And if you run into a cash-flow crunch and have a good on-time payment history, these suppliers will generally allow you to arrange a payout of a particularly large bill.

Perhaps the best way to control A/P in a larger sense is by negotiating terms with trade vendors. As long as you understand what the market will bear, your suppliers will likely be flexible. For example, someone in the wine business might have typical inventory payables due net 30 or 60. Suppliers may offer him what are called, “depletion terms”— when he sells the inventory, he pays for it.

Industries requiring a larger outlay for inventory often give “dating,” or installment, terms. A typical dating terms arrangement is first third due net 30, second third due in 60 days and third installment due in 90 days. Often, dating terms would be requested by a business taking on a new inventory line requiring a large capital investment.

If you have a cash shortfall and have a good relationship with a key supplier, you might consider negotiating your short-term trade payable into a note payable. One note: Slow-paying some accounts payable may help cash flow, but be careful and discuss it with suppliers first.

Sources: “Speed Up Payment on Receivables,” CPAResource; “Working the Accounts Payables,” AllBusiness