In any business in India, one of the most essential parts of financial health is managing your business cash flow. While businesses are confronted with increasing costs, taxes and industry competition, optimizing cash flow can make a major impact for enterprises. A 2022 survey found that 75% of businesses in India faced cash flow issues. To manage this problem, optimizing your accounts payable is the best way.
Best Accounts Payable Practices in India
All businesses utilize accounts payable (AP) to handle payments to vendors and suppliers. If you don’t manage it right, you could end up paying late fees, miss out on early payment discounts or degrade relationships with important suppliers. However with a few best practices, you can avoid these issues and keep your cash flowing healthily. The best accounts payable practices to boost cash flow in India are:.
1. Automate Your Accounts Payable Process
Automation is a simple method to organize your AP procedure. Manual systems take time, are error prone and might miss deadlines, lose invoices or two-fold payments. The automation of your accounts payable reduces these risks and also saves time.
Automated AP systems process invoices faster, flag errors and identify fraud. You can schedule automatic approvals for recurring payments to ensure bills are paid out promptly. Automation also provides you with better visibility in your finances, keeping track of your receivables and boosting your cash flow.
2. Negotiate Payment Terms with Vendors
For improving your cash flow, you must negotiate. If your vendors need upfront payments or have short payment windows, this can choke your cash flow. However negotiating better payment terms lets you spread your expenses out over an extended time.
Most suppliers in India can extend payment terms if you ask. You can negotiate net 60 or net 90 terms rather than net 30 to gather revenue longer prior to paying your suppliers. This reduces the immediate financial pressure and also helps your cash flow.
3. Get Early Payment Discounts
Some suppliers give early payment discounts to encourage fast payments. These discounts may be anywhere from 1% to 3% of the full invoice quantity – a little price to pay as time passes.
If you have enough money on hand, paying early saves you cash in the end. For instance, in case a vendor gives a 2% discount on payments within ten days, utilizing that discount would mean you are obtaining a 36% annualized return on the total amount given early. Thus, find out if any of your vendors offer early payment discounts, and make the most of them to improve your cash flow.
4. Prioritize Invoices By Payment Terms
It is tempting to pay invoices as they arrive but that is not necessarily the most effective way to handle cash flow. Rather, you should put payments first based on due dates. Pay attention to payment terms, late fees along with possible early payment discounts.
You can also schedule payments so that you are not paying all of your bills simultaneously, as this may strain your cash flow. For instance, if certain bills aren’t due in thirty days, you do not want to pay them right now when you could use that cash for other needs now.
5. Track Performance Using Accounts Payable KPIs
Tracking key performance indicators is essential to understand your AP process. Common AP KPIs include:
- Days payable outstanding (DPO): This shows you the number of days it takes your small business paying its suppliers.
- Cost per invoice: The cost of processing an invoice, including labor along with other resources utilized.
- Payment accuracy: The % of payments that are made with no errors.
Monitoring these KPIs could uncover bottlenecks and inefficiencies in your AP operation. For instance, high DPO might mean your business is taking a long time to pay suppliers, which could harm relationships. Alternatively, poor payment accuracy could mean you’re paying invoices twice or even missing deadlines, and both are harmful to your cash flow.
6. Reconcile Accounts Frequently
Regular account reconciliation keeps your records current. By reconciling your accounts earlier, you can spot any discrepancies early like duplicate payments or even missed invoices. This technique assists you to stay away from costly blunders which affect your cash flow.
Reconciling accounts is particularly essential in India where companies get a great deal of invoices from multiple vendors. By reconciling frequently (ideally monthly or weekly), you can keep paying for goods or services received and safeguard your cash flow.
7. Centralize Invoice Management
A centralized way to handle invoices could aid in cash flow. In case invoices are dispersed throughout departments or handled by several personnel, it is easy to lose track of them. This could bring about delayed payments, skipped early payment discounts, or fines for late payments.
A central invoice management system stores all invoices in one location enabling easy tracking. This removes the danger of mistakes, improves transparency and also helps you make on time payments.
Final Thoughts
Improving your accounts payable procedure will help boost your business cash flow. Best practices like automation, negotiating better payment terms and routinely reconciling accounts can help you avoid common AP challenges and maintain a healthy cash flow. In India, optimizing your accounts payable is essential to long term financial success.
For expert advice on optimizing your AP process and also improving your cash flow, consult StartupFino for your accounting and financial management needs.
FAQs
How can accounts payable boost cash flow?
Accounts payable could boost cash flow by managing payments properly. Negotiating better payment terms, utilizing original transaction deals and staying away from late charges can help companies optimize when they pay invoices, lessening financial load and freeing up money for daily operations.
How might increasing payables days improve cash flow?
Increasing payables days means businesses can hold cash longer before paying suppliers. This longer period gives more time to obtain revenue or reinvest in the business thereby enhancing liquidity and cash availability for much more immediate financial requirements.
How could accounts payable be made better by the AP process?
Improved AP process with automation, better tracking and organization reduces errors, delays and inefficiencies. It enhances payment accuracy, improves cash flow and also strengthens vendor relationships through timely payments by staying away from late fees and using early payment discounts.
How to make AP work faster?
Automate workflows to minimize manual mistakes, centralize invoice management and create payment reminders to make AP more effective. Also, prioritize payments on due dates, negotiate favorable payment terms with suppliers, and frequently reconcile accounts to maintain accurate records and on time payments.
