Did you know that cash flow is the number one reason most businesses fail? Actually, about 82% of small businesses fail because of poor cash flow. You can resolve problems with cash flow by paying special attention to accounts receivable and accounts payable. Consider using these accounting functions to build healthy profits and avoid becoming part of the 82%.
Investopedia defines accounts receivable as the accounts or payments that a company will receive from its customers and clients. Accounts payable is the debt that a company owes to lenders and debtors. While accounts receivable can pay off the debt your business owes to the lenders, not paying close attention to accounts payable can harm the overall health of your company.
Both accounts receivable and accounts payable can affect cash glow health. When you receive money from a lender for purchasing items, this is a positive cash flow. However, as soon as you pay the debt when it is due, the cash is withdrawn from the cash flow and it decreases.
Listed below are five tips to consider for better accounts payable which contribute to the overall health of your small business.
1. Review all accounts and determine the state of your cash flow from operations
Managing your accounts payable has to start somewhere. First, small business owners and managers should focus on reviewing all accounts and determining the state of cash flow from the operations. How much debt does your company owe? What do the accounts receivable look like?
2. Establish credit terms
Handling debt can be stressful. Since cash flow is the heartbeat of a company, it needs to be strong and reliable. Another tip we have for you is to establish credit terms. When invoicing a client for credit payment, it is necessary to establish terms like late fees, payment timeframes, and the maximum credit allowed.
3. Shorter transaction cycles
Longer transaction and invoice cycles can confuse clients and managers and lead to issues with cash flow. Instead of allowing long transaction cycles, changing the cycles can increase cash flow at a healthy rate.
Financial accounting software can set shorter transaction cycles and dates. As a small to medium business owner, you can set terms and dates for all transactions. The longer the transaction cycle, the later payments are from clients.
Automating accounting for invoices and small companies can make it a lot easier to keep track of cash flow. There are hundreds of amazing software, management systems, and websites to use.
Automating AP is wonderful because the system can make payments and keep track of transactions in one place. This limits fees and decreases the chances of making a bad impression on suppliers. Tax season is also frustrating, but using automated and online software programs for invoicing can make it easier to track transactions, deductions, and more. Leaving a paper trail is important.
5. Manage Aging Accounts
An AR aging report collects data about the financial health of your company, including cash flow. In this report, you can find all accounts including what they owe your company and what you owe them.
Keeping track of and managing aging accounts and unpaid invoices can increase cash flow. Leaving unpaid invoices and balances can disrupt balance and lead to financial issues. It is good to set goals and timelines for AP.
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