Cash Flow Management Part 2

file2461263253373The second component in the management of cash flow is Accounts Payable.

I have a different view on cash flow and accounts payable vendors than most people do. I recommend that your vendors be managed in the same manner as accounts receivable customers. You should have a friendly relationship with your vendors, while building credibility through following through on any promises made to them. Also, communicate with them and take or return their calls promptly.

If your business finds itself in a tight cash flow situation, delaying or stretching payments to payable vendors can act as an interest free form of financing. But, you will only be able to accomplish this if you have laid the groundwork and have an open and  mutually respectful relationship. Openness and honesty will go a long way toward cementing a relationship that can keep you in business, while delivering product to your customers in a timely manner.

If you should find yourself in a situation where cash flow is tight or non-existent, call each vendor and apprise them of your situation, what you are doing to correct the problem, and how long that you see this situation lasting. Set up payment plans with all who will go along with your plan. It is critical that you do what you say you are going to do, so devise a payment plan that is feasible and can be adhered to. Send the payment plan in writing, to your vendors for their approval. Ask that they initial and return to you, now you can start putting this aspect of your cash management plan into action.

I cannot stress enough, that without credibility and communication among your payable vendors, this will not work and you will need to rely on another action plan. Also, this is not a long term solution, but it will enable you to work on and find a solution to your current cash shortage. There will be those among you who are going to say, what about our Dun  and Bradstreet rating? Well, at this juncture, staying in business is the goal. The vendors  that you have had long term relationships with or who you presented a plan and followed it religiously, may not even bother reporting the slow pay information to Dun and Bradstreet. Your Dun and Bradstreet rating at this point is the least of your problems, don’t worry about it.

There may be a time where a vendor or several of them may ask that you pay on a COD basis for any new products ordered. I have been in this situation several times, and I agreed to do this, but I also asked that the COD payment be applied to the oldest invoice. This helps both of you in that on the vendor end, it benefits their accounts receivable aging and accounts payable aging in your case.

The goal is to keep product coming in, which will enable you to keep shipping products to your customers and collecting the receivable.

There are several industries where a payment plan will not work, and a few examples of those are, utilities, leases, insurance, bank loans and employee benefit programs. That’s not to say that you cannot stretch these somewhat, it will depend on how good your sales skills are. I have stretched all of these examples and it was a case of gaining experience and making mistakes along the way.

In summary, if you are going to use accounts payable to effectively provide some relief to your cash flow, you must be creative, honest, an excellent communicator, and a master negotiator, but if done effectively, this plan of action may be the difference between staying in business, having lawsuits filed or collection agencies pressuring you for payment.

The next part in managing cash flow will be, your banker relationship.

For more advice, you may contact us at 3306202761.



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