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Why pay attention to payables?

Posted on:  ,  | Author: ATB Business & Agriculture

As a small business owner, you know that making sales and collecting accounts receivables will keep your business growing. But savvy business owners also know that managing liabilities is another key to financial success.

Here's a quick refresh of the balance sheet calculation:

Assets - liabilities = owner's equity (or your business's net worth)

Assets are the cash, inventories, land and buildings, equipment and accounts receivables you use to operate your business on a day-to-day basis. Liabilities are the debts or financial obligations that you owe to external parties, which may include bank overdrafts, tax liabilities, and accounts payables. Accounts payables can include materials, supplies, utilities, payroll, taxes, rent or debt payments and interest expenses.

When cash flow is tight, you may believe that delaying your accounts payables is a good idea, but this is not a long-term option. A few late payments can easily snowball, so you need to make sure that you manage your payables in the most effective way possible.

How can I manage my accounts payables more effectively?

Regular monitoring:

  • Make sure you understand payment terms before you sign any contracts. It’s also wise to review invoices and payables regularly. Make sure payments are made on time or within a specified period to take advantage of any discount benefits. 

  • Keep an up-to-date listing of your accounts receivables and accounts payables, so you know when to expect payments and when bills are due. Reviewing this list regularly will help manage your cash flow ‘in the moment’. Following up with delayed receivables will help you collect outstanding funds sooner, which will also help reduce cash flow shortages.

  • Bills should be paid by the due date to maintain good relationships with your suppliers. If you continue to make payments on time, or if you have excess cash and want to pay early, you may be able to negotiate early payment discounts. If you can create strong relationships with your suppliers and consistently make your payments on time or earlier than agreed, your supplier may be more willing to extend payment terms or make another agreement when cash flow is tight.

Proper planning:

  • Not all payments need to be made at the same time. Payroll, taxes, loan payments and obligations to vendors may be due at different times of the month or year, so prioritize by order of importance. Taxes, payroll, and any financial loans should always be paid before other expenses to avoid costly penalties.

  • Pay attention to cyclical trends that may affect your cash flow needs throughout the year. Planning for upcoming short-term expenses can help alleviate the strain on accounts payables.

  • When you're about to make a significant purchase of any asset—such as new equipment or buying a property—make sure you consult a financial expert so they can help you make the right decision for your business and ensure that it is financed appropriately.

With these tips in mind, you should have a stronger understanding of your cash flow situation that will help position your business for future success.

For more information about how to manage cash flow for your business, download one of our free business guides. Alternatively, you can talk to your local ATB Financial Relationship Manager.

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