Receivables & Payables

Managing receivables and payables is all about getting cash in the door as fast as possible, cutting costs, and making payments as late as possible. By accelerating receivables and stretching out payables, businesses are in a much better position to control their cash flow.

An unfortunate fact of any business transactions is that customers will often postpone their sales as long as possible. Cash management, on the other hand, requires the timely collection of every sales dollar. An assertive collection program is therefore essential in managing your business’s cash balance.

Assertive collection requires:

  • An initial screening of customers before they are granted credit.
  • Establishing a firm written credit policy and letting every customer know in advance the company’s credit terms. For example; When will you invoice? How soon is credit due? Will you add a late charge?
  • Taking immediate action if an account becomes overdue
  • Depositing customer checks and credit card receipts daily. Some banks allow owners to deposit directly into interest bearing accounts

The timing of payables is just as crucial to proper cash management as the timing of receivables; however the objective is just the opposite. Business managers should attempt to stretch out payables as long as possible without damaging the company’s credit rating. If the company’s credit rating is damaged suppliers may begin demanding prepayment which will severely damage the company’s cash flow.

Companies who are successful in avoiding this whilst stretching out their payables often do things like:

  • Take advantage of cash discounts vendors offer. A cash discount offers a price reduction if the owner pays an invoice early
  • Negotiate the best possible credit terms with suppliers. Most vendors offer trade credit.
  • Scheduling controllable cash disbursements so that they do not come due at the same time (for example, paying employees every two weeks rather than every week, reducing administrative costs).
  • Using business credit cards wisely. Avoid cards that change transaction fees as some change interest from the date of purchase but others only from the invoice date.