Determining Critical Accounts Payable For Your Small Business
In real estate, the age-old mantra is location, location, location. For growing businesses, it’s cash flow, cash flow, cash flow. Timing is a critical factor for determining the viability and longevity of a growing business. Even though we all know cash is king, many small businesses overlook the critical importance of monitoring and analyzing their cash flow, especially their accounts payable. In fact, 69 percent of companies report having limited or no visibility into their spending1. Without a cash planning strategy in place, even seemingly successful businesses may fail when they come up short on cash to meet the growing demand of their sales.
Oftentimes, businesses limit their scope for cost savings opportunities by looking at materials and payroll only. However, to be strategic, your business must look for additional ways to enhance efficiencies, reduce costs and improve overall business operations. While it sounds counter intuitive, accounts payable just might be an untapped honeypot for strengthening your business.
The conventional mindset for many small businesses is that all accounts payable are created equal – this means they’re missing a significant opportunity to decrease costs while increasing revenue. Tackling all accounts payable equally or without a clear spending plan can negatively impact business operations and controls, and result in increased transaction expenses for the business. Drinking from this metaphorical AP fire hose reduces overall efficiencies, creating longer response times and processing cycles, reduced internal controls (fraud, error) and increased expenses. In fact, lagging companies take nearly twice as long to process and schedule a payment, and end up paying over $58 per invoice, versus just $1.50-$2.00 for best-in-class firms.2
By shifting to a proactive AP Segmentation approach, your business can prioritize handling of the highest value accounts payable in relation to impact on your business. Important factors to consider include the type and timing of invoices, the vendor/project relationship, and the overall critical impact on essential business operations. If it’s time to get strategic with your business’s account payable, here are some guidelines to get you started.
1. Define What Matters Most
Determining high-value or critical invoices for your business does not mean you’re defaulting on the low-value accounts payable; it simply means you are being proactive with your cash flow. By segmenting your AP based on the potential strategic or problematic value of the invoice/vendor/project, you are being smart about who gets paid first and when that transaction is processed. Typically, you’ll want to focus on anything that impacts your revenue or costs, affects liability or compliance, or has the potential to damage business relationships.
2. Be Realistic
Creating realistic internal AP review processes can improve efficiencies and reduce added expenses, such as late payment fees and human error. Internal controls can still be maintained without requiring multiple approvals and extensive review procedures for every invoice.
3. Make it a Rule
Once you’ve determined the impact and the value of your various accounts payable, your business must adopt a rules-driven approach to ensure control, consistency and efficiency. Every department and every manager must conform to the same foundational rules of AP segmentation, which allows the company to maximize employee efficiency and minimize costs.
4. Embrace Automation
Let’s face it, it’s hard to see the forest through the pile of trees sitting on your desk. Manual processing and paper billing create unnecessary expenses for businesses – consider the costs of paper, printing, mailing, duplicating and storing paper documents, in addition to the costs associated with human errors related to misplaced or duplicated invoices, data entry errors and fraudulent activities. Once the structure and the rules are in place, automation is the next step towards improving efficiencies and controlling costs for the business. Web-based bill payment portal allow businesses to prioritize bill payments, map out the review and approval work flow by invoice, and electronically store the record of payment with invoices in one centralized data storage site.
Enhanced controls, increased efficiencies, improved cash flow planning and reduced costs are just some of the significant and positive returns your business can achieve by defining and deploying a strategic approach to accounts payable. By aligning how, when and where money is spent with overall goals and KPIs, your business can focus on efforts that offer the most benefit for the overall health of your company.
1 Mary S. Schaeffer, An Accounts Payable Game Plan: What You Don’t Know About AP Can Hurt Your Bottom Line, Amazon Shorts, 2005.