How To Increase Accounts Payable?
Accounts payable or AP is the position where the business owes its suppliers and vendors for services or products it has received but did not pay for. AP is included as an asset in the total liabilities of a company. Here are some tips that can be implemented by businesses to enhance accounts payable.
Offer Payment Terms
A simple method of increasing accounts payable is by increasing the Accounts payable cycle, or the time it takes to pay suppliers. For instance, if it is currently possible to pay bills right after receiving a reminder or within thirty days, it might be advantageous to delay such payments for sixty or ninety days. This gives you additional time to have useful of the cash before payment is made. Some vendors have no problem in giving credit to customers who are loyal and would be able to order consistently.
Always make sure that when you are asking for long credit terms for payment, you should also provide some assurance to the vendor, like another order from you, in return. This should be said to the suppliers, ensuring them that they will be supplied with steady and constant amounts of business in exchange for elongated payment terms. This is preferable to what the Code prohibits as an extension of credit without the consumer’s consent through merely postponing payments.
Such discounts are usually offered by sellers to buyers who are willing to make early payments.
Another solution is to pay the amount earlier that vendors suggest to get a discount which, however, increases AP. For instance, a supplier may choose to give you a discount of 2% provided the invoice is paid within 10 days out of the total 30 days. To reduce accounts payable, having made early payments to achieve a cash discount will reduce the amount of cash held as accounts payable.
For instance, if you pay your suppliers early often by using early payment discounts, then your AP balance will be low. But, you will still be able to claim for cheaper purchases that will enhance the income statement of the company. The only problem with this is that in the short term, you have less cash flexibility than if you were holding nothing but cash.
Spend Just Under Budget
Holding a regular high percentage of expenditure throughout the month increases the AP rate within an organization. Whenever possible, try to stay slightly below monthly expenses so that you do not use up the entire amount for the month. It builds up and there will always be spare amounts in the budget and cash flow month after month. This is a way of preventing taking the accounts payable to their limit.
Still, you will require the CFO or owner's permission to withhold from budgeted expenditures if they affect other concerns. However, in those months when additional working capital is achievable then to pocket such an amount offers more options in the longer run.
Push Out Payroll Taxes
Although not necessarily good business practice, the company has the choice of deliberately running down state and federal payroll taxes up to the very day of their due date to increase cash balances and the payables list. For the most part, tax agencies offer extensive time frames within which employers can make payments for the withholdings of employee income taxes, social security, Medicare, and unemployment insurance.
Carrying on with the policy of paying taxes only up to the legal limit of the company’s ability to do so could release thousands of dollars monthly that can be expended on other operational expenses. This leads to higher AP as you end up paying taxes when due on any liability. Although the IRS and state agencies are allowed to put interest and penalties on the delayed payments, all those costs are still less than not fulfilling the essential suppliers' and vendors' payments.
As you will notice, this tactic may only buy time and may not have a long-term effect on the perceived problem and its solution. Moreover, it increases the interest expenses should payroll tax dues be paid after a certain time. Also, it hinders your chances of getting loans when your financial records are scrutinized by the lenders.
One thing that should be avoided is offering cash as the payment method because this can lead to the creation of a cash culture where people become used to being paid in cash and end up neglecting other forms of business such as barter trade or offering stocks which may be very beneficial to a business.
To manage their limited funds, some startups take the following measure of providing some vendors with stocks or equities to be paid back from their share of the business. This is because sourcing for funds from other sources can be very expensive and this will only further drain the little available money. It also provides a solution wherein the vendors become the stakeholders and participate in the company’s revenues in exchange for the payments which is owed to them.
The vendor tells another story in this arrangement because they bear more risk but reap more benefits when the price of the stock rises in the future once certain milestones are achieved. On the other hand, the company is still in business, but it is shown to have a higher AP on its balance sheet. Just be cautious though because equity transfers can even get a little tricky in terms of the rights, ownership, the value of the stocks being transferred and the taxes involved. Therefore, legal consultancy is recommended before sinking equity into fulfilling payables.
Finance Short-Term Operating Expenses
Instead of using cash to fund all expenditures during the fiscal year, use credit to pay for at least some of your purchases. For example:
• Lease office equipment: Hardware like copiers, computers, servers, and many others can be taken on an agreement that can span several years rather than being bought. Leasing converts these significant, often infrequent capital outlays, into much more frequent operating expenses.
• Business credit cards: Use credit cards, even for small, everyday items, which will have an interest rate of 0% for 6-12 months. So long as you pay the balance when rates apply, it offers a free short-term float.
• Bank line of credit: A revolvable credit limit offers a constant line of credit whenever it is required by a business person. It functions with a credit card type where interest rates are only paid on the amount borrowed out of the total available. While LOc is not reported as AP it offers a higher spend limit.
The use of financing for operating expenses can help to avoid taking money out of the business’s pockets. It essentially shifts short-term expenses to AP because you need to pay monthly to equipment lessors and credit card companies. However, it is essential to be cautious of high-interest costs after the first years, thus always having a strategy to clear your balance.
The above-stated strategies provide an instance of how different methods are available to entrepreneurs to increase their accounts payable balances when required to fund more operating expenses. It is critical to select options that are aligned with your business model and do not compromise supplier relationships in the long run.