Paying your company’s bills is just as important as collecting your own receivables — and they need just as much management. The good thing is, you have a surprising amount of control over how and when your company’s debts are paid and that provides several advantages.
Start inside the business…
First, adopt good internal controls for the payment of your bills. You need to reconcile both:
- Purchase orders with the invoices and statements your vendors send
- Accounts payable subsidiary ledgers with the general accounts payable ledger
Once you have those controls working, consider these ways to effectively manage your company’s debts and maximize your cash flow:
- Keep interest-earning cashin the bank for as long as possible, but not too long. If you don’t already have an interest-earning account, talk to your banker about a money market or some other interest-bearing vehicle. Consider using cash to pay down your lines of credit.
- Periodically provide your banker with updated cash-flow projections. An improved cash-flow picture might result in better terms on any open lines of credit. On the other hand, if the projection is less than robust, your banker might increase your line of credit with no bump in the interest rate, depending on your firm’s overall financial condition.
- Consider borrowing against the cash values of executive life insurance policies. This can reduce your net interest cost, because life insurance loan rates are generally lower than bank rates.
Then work your way out…
Of course, you should be using your suppliers to help finance purchases, as well as freeing up some operating capital, by taking advantage of favorable payment terms.
The more business you give to suppliers, the better the payment terms you should obtain. The goal is to widen the spread between sales revenue and payments, allowing you to maximize your cash balances at very low cost. To that end:
- Use every possible discount. Have your accounts payable department maintain a calendar-style schedule to ensure payments are made within discount periods.
- Stretch payments to their latest date.
- Negotiate extended terms when possible and appropriate.If you’ve been a good customer you might be surprised at what your vendors will agree to.
By implementing smart debt management practices, you’ll streamline your debt payment plan and gain more control over your bottom line.