The two major cycles that every business has are the revenue cycle and the expenditure cycle. The revenue cycle revolves around sales, revenue collection, profits, customer conversion and retention, etc. Whereas, the expenditure cycle includes the working capital, inventory, production expenses, operational costs, etc. Accounts payable is one of the most crucial segments of the expenditure cycle.
Many businesses may tend to elongate their payable cycles to increase the cash flow. But this is not a recommended good business practice. A longer payable cycle has several disadvantages. It can abrade the purchaser’s goodwill. The delivery times can slow down. Future payment terms can become onerous. However, early payments can yield substantial benefits from the supplier’s side where one may make use of attractive rebates.
If your business too is struggling with longer payable cycles, here are a few strategies to deal with it.
#1. Adopting business good practices:
There are diverse good practices for businesses and may vary from business to business. However, some basic practices remain the same. For instance, having a centralised accounts payable processing and reporting system.
Although Electronic Data Interchange (EDI) is practically not possible for all businesses, wherever possible, the processing environment can be made paperless. This can be done by using electronic communication for vendors, having an automated purchase order generation, accepting electronic invoices, tracking receipts, automating invoice payments and more. They will not only help in decreasing the intensity and frequency of errors but also keep the marginal account balances according to the payable dates. Another added advantage is the reduction in processing cost which is, of course, an inevitable expenditure.
#2. Strengthening purchases:
For this, you can adopt purchase order financing where you take a business loan only for a certain time and for a particular invoice or a portion of the invoice. It is one of the most efficient methods to enhance the efficiency of your accounts payable process.
Check your purchase order invoice eligibility for PO financing with our business financing offerings.
#3. Improving your vendor selection process:
You can do this by establishing priorities for the vendor negotiation process. You can negotiate for volume discounts. For having the capital, you can also make use of purchase order financing from a lender. Discounts you get may help in increasing your profits by cutting down production costs thereby increasing your cash flow.
#4. Staying updated:
Always keep a track of your payables during the credit time. There may be opportunities where early payments can help you with good discounts and trade spend initiatives. You can always use invoice financing offered by Fintechs in case you don’t have the working capital at the time of offer availability.
#5. Adhering to strict invoice policy:
You can improve liquidity by proper management of the invoicing process. Always track invoices against the raised POs, process them timely and validate them. Approve payments only after the validation of each invoice against the contract terms. Also carefully select the payment method to minimize transaction charges and processing time.
Try these strategies to free up your formal working capital. This in turn can streamline your purchase cycles, reduce costs with discounts, enhance service levels, add more funds for expansion and even generate new opportunities. With an effective approach to the payable cycle, you can increase corporate cost management, reduce process complexity and minimize the risks to have a better operating margin.