Finance

Free up cash by optimizing your working capital | accounts payable (4/4)

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Improve your company’s liquidity

We presented in our previous articles how efficient inventory management and good management of your accounts receivable contribute to improved working capital. However, effective working capital management is not limited to these two components. Optimization of your accounts payable is the third important pillar of working capital management.

In this article, we present how a good management of supplier relationships and related accounts payable can contribute to your company’s liquidity. Because… the longer you can wait with paying your suppliers, the longer you have cash available for other business purposes. 

Tips and tricks

Below, we share some advice on how to optimize the management of your accounts payable:

  • In addition to evaluating the quality and price, you should also both take payment conditions (payment terms, early payment or quantity discount, etc.) and terms of delivery into account. You can benchmark these conditions with those of other suppliers or industry-specific conditions;
  • Pay special attention to a contract’s conditions (e.g. reasonable terms of notice) when awarding contracts to suppliers. Furthermore, make sure that you are not or do not become too dependent on certain suppliers;
  • Evaluate your suppliers systematically. Examine if there are indicators (e.g. new developments at competitors of your current supplier) that might make your negotiation position stronger to negotiate improved conditions;
  • Consider for every supplier if early payment discounts are more beneficial than making use of the deferred payment negotiated in the payment terms;
  • When you choose to make use of the deferred payment, make sure to systematically pay your supplier’s invoices a few days before their expiry date. As such, you will avoid penalties for late payments and be able to improve your supplier relationships;
  • Synchronize your supplier’s payment terms with the payment terms that you grant to your customers. 

Next to optimizing your accounts payable, is a good organization of your accounts payable department also important. Because… a good internal organization will contribute to better supplier relationships which contributes to a better negotiation position. 

Interested?

Do you also wish to optimize the working capital in your SME? We are happy to come and visit you. Email us at info@horsum.be or call us on +32 9 378 38 28 for more information.

horsum is a recognized service provider of the KMO-portefeuille.

Frederik Vervoort – December 14th, 2016

 

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