Is it possible to strike a balance between accounts payable and receivable? Can you get paid on time and pay on time?
Businesses in America lose 51.9% of their receivables after remaining unpaid beyond a 90-day timeframe. Also, 61% of late payments are due to late or incorrect invoices. These worrying statistics are an unfortunate reality for many finance and operations department heads.
Managing a business’s working capital requires a balance between accounts payable (AP) and accounts receivable (AR). As you continue to handle more transactions every day, you need to know when to collect your debts to manage your current assets and pay debts to manage your current liability without destabilizing business operations.
But let’s face it — maintaining the right numbers on your balance sheet is hard without a concrete system. How do you know when to click a button, analyze an account, send money, and make payment requests?
We’ll be diving into the tactics that help you master the balance between accounts receivable and payable beyond numbers in your general ledger.
By the end of this guide, you’ll know how to:
- Create policies for AR and AP and manage aging accounts
- Automate data collection for accuracy
- Enhance your supply chain visibility
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Manage Your Transaction and Conversion Cycles for Accounts Receivable
Analyze your cash conversation cycles (CCC) to determine how long your cash is caught up in the production and sales cycles. How long do your customers take to settle invoices, thereby affecting your accounts receivable? The period it takes to collect your receivables influences how long you take to settle debts and bills and affects your balance sheet’s look.
- How long it takes for your department to send invoices to customers and purchase orders to suppliers
- The timeline established in the department policy
Losing time in making a purchase order affects your inventory, which slows the sales cycle and affects the accounts receivable. Also, late invoicing delays debt payment and increases your accounts payable. Without a reliable conversion period for debts, it becomes challenging to stay on top of debts, which affects your access to credit.
Create a reasonable timeline for sending invoices and purchase orders. Ideally, your timeline for receivables should be shorter than your payables. This way, you have enough time to gather the cash to pay your debts in time and avoid defaulting.
For example, set your days sales outstanding (DSO) at 30 days, which means that your receivable should be paid within 30 days. You can then set your days payable outstanding (DPO) 45 days to give you the flexibility to manage money as it flows in.
But how can you tell if your DSO is working to your advantage? The following key performance indicators (KPIs) can help you enforce your DSO to avoid delays.
- How many invoices are past your DSO?
- How often does the sales team disregard the DSO?
- If most of your invoices are past due, should you change your DSO?
Establish Policies for Managing Your Accounts Payable
Managing your AP ensures that you reduce your current liabilities without defaulting or limiting your operations. There are several key features to observe when creating a policy for AP, including:
- Do you have policies for verifying an invoice, the vendor, and the goods? Are you paying for goods delivered in the correct quality and amounts?
- Are all invoices and receipts produced in a standardized manner to avoid duplicates, errors, and omissions? All operations in the AP department should follow a single procedure to avoid confusion.
- If an invoice exceeds a certain amount — for example, over $1000 — is there a stricter policy for verification? How can you verify that the supplier is not overcharging?
- How often should you review accounts payable to ensure that you don’t default on bills?
- Is there segregation of duties to separate checking, reconciliation, and signing off on payments?
Establish Clear Policies for Credit
Clear policies that define when to offer credit, how long to offer it, and when to follow up on payments affect your accounts receivable. Follow these best practices:
- Check if your DSO reflects the reality in the market and the current payment trend in the AR. If the deadlines are always crossed, it’s time to rethink your DSO.
- Your receivables department offers credit based on the client. Long-term clients that pay on time enjoy more leeway than new and short-term clients. However, are there policies defining when you can override credit limits? In instances where clients need to override the credit limit, it’s important to seek pre-approval from the finance department.
- Determine the due process for accessing better credit lines. If a new customer wants to make large purchases, a credit and background check is necessary. It would also be best if you altered your credit limits depending on the market at the time. If an industry is struggling, it’s best to impose strict rules for approving credit limits.
- Establish a defined period of time for reviewing, approving, and rejecting credit applications to reduce lost sales.
Master Your Data
Keeping accurate records for credit limits, invoices, receipts, discounts, and addresses specific to a client is vital for managing your AR. Your data on a customer should indicate:
- The customer’s name, address, debts, and credit limit
- Payment terms (When should you send the invoice and collect payment?)
- Discount terms depending on volume and product purchased
- The order confirmation
Your AP data should indicate:
- The vendor name and address
- The quality, make, model, and amount of goods and services delivered
- Confirmation of delivery
- The payment terms (What is the period of time until default?)
Any discrepancies in the data cause chaos in your business operations. It’s also vital to update the client profile when it changes. If you approve a higher credit limit for a customer, it should show in the system to avoid delays. When you make a payment to a supplier, record it immediately to prevent double payments.
To manage your overall data, you should:
- Select a central system and software that automate data collection and ensure accurate bookkeeping.
- Identify your bookkeepers and data managers who oversee the overall financial and logistics information.
- Create policies and systems for data sharing among departments.
- Create timelines for updating client and supplier profiles.
- Establish controls for who can access data and make edits.
Improve Your Supply Chain Visibility
Tracking your supply chain from the raw materials to the final delivery to a consumer is vital for managing your AR and AP. Your supply chain information affects your supply chain visibility. It’s best to automate data collection and delivery tracking to know your inventory, current assets, current liability, and, consequently, how those elements affect your cash flow.
Ideally, a highly visible supply chain should have this information:
- Current status of raw materials or goods in the manufacturing line
- Order receipts from the supplier
- Delivery date by a supplier
- Shipping details, including tracking
- Purchase orders by customers
- Delivery tracking for goods sent to a customer
- Current inventory
Collecting supply chain information in one software with multiple integrations helps you:
- Ensure appropriate inventory levels while managing multiple vendors.
- Know when and how much to order to manage spending patterns, purchases, and your company’s cash flow.
- Learn how to predict and manage changes in supply and demand that affect your accounts receivable and payable.
Monitor Aging Amounts in Your Accounts Payable and Receivable
Unfortunately, not all customers are keen on paying their outstanding invoices on time, which means you need a collection plan to lower your doubtful accounts and bad debt. The longer your receivables age, the longer you may be risking credit, cash, and liquidity. If you don’t pay your short-term debts, your suppliers begin to enforce stricter measures on you.
- Look into your invoicing procedures and bill collection procedures to limit delays caused by poor communication and enhance early payment.
- Ensure your data collection is accurate and automated to reduce human errors.
- Engage the AR department to contact customers and follow up on late payments.
- If changing a client’s payment plan is a suitable option for the client, negotiate new payment terms that align with your policies. If you are the client, contact the supplier before your payment period lapses to negotiate a new timeframe.
- Stop all business and credit sales for clients that are not paying.
- Create a precise term in your policy that defines the timeframe for paying and reaching out to vendors.
How Automation Helps You Manage Your Accounts Payable and Receivable
Consolidating your orders and suppliers, managing accurate bookkeeping for debit and credit, and making and collecting multiple payments on different platforms is challenging. There are several chances for errors and omissions due to different software and formats that may confuse the user.
Negotiatus eliminates the need for multiple platforms to manage your accounts payable and receivable. With our solution, you can enjoy automated ordering, increase supply chain visibility, and manage inflows and outflows according to your preferred timeframes. Contact us today for a free demo!