Improve accounts payable turnover ratio... As a business owner, do you really need to improve your accounts payable turnover ratio? Yes, you do!
Accounts payable turnover is one of the most important efficiency ratios. You should assess it carefully and follow these tips to reduce or extend payment cycles if necessary.
Managing accounts payable cycles is essential to manage cash and improve relationships with creditors. Some companies pay their creditors too quickly, which leaves them with insufficient cash to cover future bills. Other companies damage relationships with their vendors and miss important discounts by unnecessarily delaying payments. Savvy businesses monitor their accounts payable turnover ratio and manage their cash accordingly.
You will need to monitor your accounts payable turnover ratio to identify any problems with cash flow management. Here are some tips to follow if payment schedules need to be adjusted.
Outsource Payment Processing
Every business owner have many different responsibilities, which often forces them to postpone certain activities. They often lose track of certain obligations, such as paying creditors. Outsourcing your payment processing makes it easy to stay on track and avoid late payment fees and disgruntled contractors from calling. According to a report from Wells Fargo, one company hired a payment processing company to drastically improve efficiency of accounts payables and free employees that were dedicating entire days to it.
Take a look at your accounts payable turnover period. If the turnover is about the same as the timeframe your creditors expect, then you are probably making some late payments. Working with a respected payment processing provider can reduce the turnover rate considerably. It is a good idea to consider this option if you are overwhelmed and your accounts payable turnover is over 90% of most creditors’ expectations.
Inquire About Automated Payments
Automating payments is another useful strategy to avoid falling behind. Many providers are happy to set up automated withdrawals to ensure they get their money more quickly. Some will also offer discounts for using cards, so it is a good idea to inquire about those as well.
Decide what accounts payable turnover is ideal and try to set up automated payments accordingly. For most businesses, 30 days is an appropriate turnover period, so consider paying your account balance at the same time every month.
Budget Carefully for Seasonal Changes
Many new businesses aren’t prepared for seasonal sales fluctuations. For example, many retailers generate about 25-30% of their sales during the holiday season. Many new storeowners may launch their businesses during the winter and subsequently overestimate the sales they will generate throughout the rest of the year. They may neglect to keep adequate cash reserves to pay their creditors after sales decline.
It is important to pay close attention to seasonal sales trends. If you are new to business, study industry sales patterns to forecast the amount of money you need to set aside.
Use Best Payment Types for Each Supplier
You will also need to consider matching payment options to suppliers. Some suppliers accept credit cards, while others require payments to be made by check. Using timelier electronic payments will make it easier to manage cash flow. These systems also prevent suppliers from needing to take out temporary loans to cover their own expenses while waiting for accounts receivables to be paid, so they may be inclined to extend payment timeframes slightly for customers that use them.
Tracking your accounts payable turnover is essential to manage cash flow. If you feel that your turnover is either too high or too low, then you should consider following the options outlined above. We provide other bookkeeping articles such as this if you want more information. They will reduce the probability that you will be short on cash, run into conflicts with creditors or other issues.
Please subscribe to my monthly newsletter, Bookkeeping Basics E-zine. It tells you each month about the new information that I have added, including some great tips and advice from myself and other Bookkeeping Basics readers.