Any business that has a large volume of transactions will eventually have accounts receivable and accounts payables. This happens due to a time lag between transactions and settlements. In order to manage the working capital of the business properly, there need to be clear policies to handle these accounts.
Accounts receivable keeps track of money your business is owed after supplying goods or services to customers on credit. It is an asset account. Accounts payable represents money owed to suppliers and is, therefore, a liability account.
How Payment Processing Works
Proper policies for the management of receivables and payables are extremely important. First, extending a credit period to customers is a great incentive for them to do business with you. Similarly, being extended the same period by suppliers gives you wiggle room to manage cash flow. However, there is always a risk that the failure of customers to pay receivables will lead to working capital problems. The business might not pay creditors or restock properly.
The accounts receivable process begins by sending an invoice to the customer after the delivery of products. Tracking of invoices occurs so that reminders are sent for unpaid invoices. Once payment happens, the accounts receivable account is updated to reflect the same.
In the accounts payable process, once an invoice is received from a supplier, it needs to be verified for accuracy. This includes comparing it to the purchase order and delivery note. Once everything checks out, payment is sent out to the supplier and the accounts payable balance is reduced.
Management of Working Capital
The working capital of a business is the difference between current assets and current liabilities. The accounts receivable is a big part of current assets, while payables make up a significant portion of current liabilities. The practice of best practices in managing receivables and payables will lead to a positive working capital position for the business.
Controlling Transaction Cycles
The transaction cycle for your accounts receivables is the time between the transaction date and receipt of payment from the customer. Similarly, the cycle for payables is the time between receiving a good or service and the payment date. Ideally, the transaction cycle for accounts receivables ought to be shorter than for accounts payables. If the former is 45 days, then the latter can be 60 days, which allows the organization to always maintain a positive cash position, thus minimizing the chances of failing to honor payment obligations.
Communication Between Teams
If your company is handling numerous transactions and has separate departments for handling receivables and payables, there need to be clear communication channels between them. Communication allows a change of strategy when need be. For instance, if a company sees a huge number of delayed payments from credit customers, there might be a need to slow down on procurement. If a cash crunch is expected, the accounts payable department can send out a communication to creditors requesting an adjustment on due dates for payments.
The Need for Credit Policies
Any business that extends credit to customers should anticipate delays from a few customers. It calls for shrewd policies to handle such situations. Some businesses offer shorter credit periods to new customers and extend more time to customers with whom proper relationships have formed. Early payment discounts are another great incentive for customers to make prompt payments. Customers who are consistently late on payments should be subjected to shorter credit periods.
When handling accounts payables, taking advantage of early payment discounts can lead to significant savings on procurement costs when added up over a year. It’s important to thoroughly vet suppliers to find those who offer the best credit terms.
The Value of Automating Management of Accounts Payables and Receivables
Automating your payables and receivables adds great value to your overall working capital management process. For accounts receivables, it involves the automatic generation of invoices based on a list of products you sell. With ready templates, no time is spent editing word documents or on bulky paperwork.
More Objective Credit Terms Decision
With an automated process, you can easily adjust the credit terms for the various customers your business is serving. It’s possible to see which customers qualify for longer credit periods based on the volume of purchases and past credit history. You can have a credit scoring system that objectively helps determine the appropriate terms for every customer.
Saving on Labor Costs and Paperwork
Automating routine manual tasks in the management of accounts payables and receivables saves the business both money and time. Huge numbers of incoming invoices can be checked against source documents for accuracy before being paid. Automation also reduces the possibility of errors, most of which arise from human fatigue. The quality of work also gets standardized due to automation.
Useful Dashboard Analytics
Using automation tools allows you access to a dashboard from where you can track important metrics on your payables and receivables. You can see the trend of your average collection time over weeks or months. You can also develop a collection effectiveness index to gauge the performance of your receivables collection efforts. There is value in having visibility into your payables and receivables trends because you can make policy adjustments early enough when necessary.
ProcurePort E-Procurement Tools
If you would like to employ e-procurement technology to keep track of your account’s payables and receivables, you can check out ProcurePort’s procurement software. Their solutions will help you keep track of your working capital variables. You can also request custom software to serve unique purposes in your company’s operations. To learn more, you can set up a call or demo here.