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• How can your business better understand its accounts payable vs accounts receivable? In what ways can you improve your management of payables and receivables?
• Running your business without a proper understanding of how money flows from your customers to your suppliers is akin to driving while blindfolded.
• Your business model is irrelevant if your business cannot maintain a positive cash position. Your accounts receivable is the sum of all payments you expect from your customers. What you owe to your vendors is what your payables are.
As a procurement manager, paying suppliers is an important part of relationship management. But distributing money to suppliers sounds much simpler than it actually is. Besides the payroll, procurement spending is the other major reason for cash outflow, and just like the payroll, it is mission critical. You need major visibility into payables data because it provides financial intelligence that can inform decision-making.
Conducting Analysis of Receivables
Most accounting software comes with accounts receivable aging as a standard feature. Here, you can easily print out unpaid invoices by debtors, categorized into age buckets. These age buckets need to match credit terms extended to you by vendors too. In many cases, you’ll have 0-30 days, 31-60 days, and over 60 days as the three main categories. The longer an invoice has stayed without being paid, the higher the risk of incurring bad debts. Often, this categorization informs your company’s provision for doubtful debts in your accounting.
However, your analysis of accounts receivables needs to be more nuanced than this. Perhaps you might have offered varying or longer credit terms for certain invoices. Aggregating them together with other invoices might make it appear that you are in a risky situation but that isn’t true. This calls for more sophisticated methods of analysis. Methods are more reliant on individual profiles of customers based on past history.
Automation of receivables analysis will lead to better management. AI-powered analysis can recommend when to make follow-up calls, the optimal discount to offer to promote prompt payment, and when to deny credit due to risk profile.
Conducting Analysis of Payables
The premise behind a detailed analysis of accounts payable is the same as that of receivables. To uncover financial intelligence that will lead to more informed decisions for the company.
Payables analysis goes hand in hand with spend analysis. You want to find out where you are spending the bulk of your procurement budget. You will be able to explore and take advantage of supplier consolidation opportunities. As part of the analysis, plot your payables position at the end of every month. Over time, you can tell whether the business is taking up too much or too little risk.
Certain metrics are quite important in spending analysis. Spending per category reveals which departments or types of goods are taking up what portion of your budget. Afterward, you can start asking questions such as whether you can negotiate for better payment terms in terms of credit period and discounts. You might also look at spending per business division or region to help you drill further into your data.
Tips to Help You Manage Accounts Receivables vs Accounts Payables Better
Adopting certain best practices will help your business attain healthier receivables and payables position.
First, your business must never operate without a credit policy that’s been approved at the highest decision-making level. The policy must consider the profile of customers so that first-time customers and defaulting customers are differentiated from regular and credit-worthy customers. In fact, this is one reason to automate the management of receivables. You can have an algorithm that takes into account the past history of customers, size of purchase, and other relevant facts when determining appropriate terms for a customer’s invoice.
Automated Invoice Matching
Automating the process of invoice approvals before payment serves several purposes. First, it reduces the risk of fraudulent payments being paid out, especially when payments are made in bulk. Automated three-way or two-way matching ensures that the invoice accurately corresponds to a purchase order sent out to that supplier. The second purpose is to speed up the process of paying out suppliers.
Proper Record Keeping
Improper records keeping are a major cause of poor payables and receivables management. You ought to have a centralized repository where documents related to purchases made by different departments are stored. This repository can then become a data source for spending analysis.
Centralization of data will also make it possible to create dashboards for real-time tracking of payables and receivables.
A lack of communication between the purchasing and sales departments can often lead to conflicting strategies. Extending 60-day credit periods to customers for instance, when vendors are only allowing you 14-day periods will ultimately lead to cash strain. It’s important to create synergies by having strategy discussions. For instance, there may be times when a company is in a good cash position and can therefore afford to run a promo to boost sales by offering a longer credit period for a short while.
What Automation Solutions Should You Use?
The tools you choose to better manage both accounts payable and receivable should ultimately add visibility to both. The tools should integrate smoothly with accounting tools such as Xero and QuickBooks to save you the hassle of manual updates when events occur.
At ProcurePort, we provide e-procurement solutions that improve your procurement spend analysis. Our AI-driven spend analysis solution automatically cleans your spent data, creates categories, and analyses it in real-time. You will be able to easily see the most important measures of your account’s payables and receivables through interactive dashboards.
Call us today for a free consultation on the right tools for added visibility into your business.