Best Practices and Strategies to Optimize Your Small Business Accounts Payables and Accounts Receivables

Accounts payable and receivables

Managing accounts payable and accounts receivable is critical in determining the financial health of any company. Properly tracking and managing them is important not only for assessing overall performance but also for helping managers and owners make smarter decisions that can influence an organization’s future.

When and how should businesses pay their bills? And when and how should they request (and demand) payment? Those deceptively simple questions can be difficult for small businesses to answer.

These best practices for accounts payable and accounts receivable can help you free up cash by optimizing your working capital. The benefit? With more efficient processes, you can reduce transaction times and improve the cash flow you need to keep your business competitive—and growing.

1) Evaluate Your Current Practices

Presumably, you have policies for both accounts payable and receivable, but that doesn’t mean they’re the right policies for your business. Nor does it mean that the policies are being followed.

Once a year, check in on how effective your accounts payable policies are by asking questions such as these:

  • Are suppliers pleased with your payment times, or is there frustration?
  • Have you lost access to early payment discounts or other savings via volume rebates and incentives?
  • Does your staff know the protocols for dealing with late, duplicate, missing, or other payment problems?
  • How much time is your staff spending on accounts payable? Is the amount of time increasing or decreasing?

Likewise, assess how well your accounts receivable policies are working by asking questions such as:

  • When payments are late, are you sending timely follow-ups?
  • Does your staff know the protocol for dealing with late payments?
  • How much time is your staff spending on accounts receivable? Is the amount of time increasing or decreasing?
  • Have there been any errors in allocating cash payments or elsewhere in the process?

2) Review all Accounts and Determine the State of Business Cash Flow from Operations

Managing your accounts payable has to start somewhere. First, small business owners and managers should focus on reviewing all accounts and determining the state of cash flow from the operations. How much debt does your company owe? What do the accounts receivable look like?

3) Establish Credit Policies

One thing owners and managers don’t like about transactions is when they take a long time to close. Receivables departments often establish credit terms, which may vary according to the clientele they serve. Regular customers with good credit ratings receive a greater flexibility period for payment, whereas first-time customers may not be given as much leeway. When it comes to payment terms, most companies establish terms at 15–30 days. Accordingly, payables departments should pay suppliers as soon as the shipped items arrive in good condition. If you do so, you might even be able to take advantage of discounts offered by suppliers for early payments.

4) Shorten Transaction Cycles

A shorter transaction cycle for items bought and sold will save your company money on labor dedicated to making those exchanges. Longer cycles might be symptomatic of workflow bottlenecks or low cash flow, as occurs when a company opts to wait to be paid for a sale before repaying a supplier. To avoid that situation, establish timelines for receivables and payables. Better still, establish shorter receivables timelines so that you can quickly deal with your accounts payable. Get departments into the habit of issuing invoices, purchase orders, and other documentation on designated days of the week or month to create a routine you can work with.

5) Stay on Top of Aging Accounts

You should be recording all transactions immediately and issuing statements regularly, but it’s also prudent to look at old accounts to make sure that everything is settled. If any outstanding receivables are on the books, take action immediately and suspend any further business with that particular client until their account is balanced. Set up a policy indicating the maximum period it should take to clear a customer’s account. Similarly for payables, if suppliers are missing payment within a designated period, pony up as soon as possible and establish a timeline for when payables should be cleared.

6) Foster Active Communication

Think of accounts receivable as your left hand and accounts payable as your right hand. Now juggle. Bit tough, isn’t it? Companies might struggle to stay on top of both departments, especially when dealing with large a volume of transactions. To make this easier, each department should consult the other on purchases and sales affecting the company. If there’s huge consumer demand, receivables can signal payables to order more items. If times are tight, payables may want to curb procurement until there’s greater stability.

7) Move Toward Paperless Processing

If you haven’t already, moving from paper-based to electronic communications with vendors can save you money, create new efficiencies, and provide a helpful tracking system. Again, the right software is essential, as it can enable you to automatically generate purchase orders for new orders, update and pay invoices, track goods received, and even resolve disputes—all electronically.

 8) Use Automation to Track Everything

Tracking accounts receivables and payables involves the creation of invoices, receipts, shipping orders, purchase orders, financial statements, and other documentation. It’s a painstaking process and one that’s even more cumbersome if even a single document slips under the radar. Using accounts payable/receivable software to automate all those transactions in real-time allows for the quick compilation of information needed for financial statements and can help track anomalies such as delinquent accounts or interruptions in workflow.

9) Setting Reminders: 

Setting reminders for your customer to make payments, and for yourself to pay your bills is crucial to making sure no payment is overdue. Piled-up AR or AP is never an indicator of a smoothly running business. The longer it takes to make the payment, the longer your accounts receivable stay open, and the less chance you have of getting paid.

10) Make data-based decisions

Some businesses rely on gut instincts to assess their accounts payable and receivable processes. Better to back up those hunches with data. With a software solution like Sage Intacct, you can add key performance indicators (KPI) to your reports, leading to a much clearer picture of the percentage of customers who pay late, the number of unreconciled items or accounts, and much more. Several accounting systems give you access to automatically generated financial reports for all the transactions going in and out of your business. This helps you have an overall understanding of how your business is doing and can help make some important decisions. Over time, that data can help you identify gaps and refine your policies.

Run Your Business Smoothly

In summary, managing your AR and AP is paramount to running your business. Monitoring and clearing them as and when they’re due ensures your business does not suffer any cashflow problems. Having control over your AR and AP and having an up-to-date picture of their status will help you plan (like maybe business expansion plans or adding a new line of product or service).

Filing Taxes has been supporting clients all over Canada to streamline their financials more effectively and productively. With reliable AP & AR services, we strengthen your financial system by efficiently updating your accounts and recording accurate and real-time receivables and payable transactions.

Our accounts payable and accounts receivable services in Toronto focus on delivering a full suite of services that are tailored specifically to your business.

Our team of expert-certified bookkeepers and accountants in Toronto is equipped to handle a wide range of AR and AP tasks. Feel free to reach out to Filing Taxes at 416-479-8532. Schedule an NTR engagement appointment with us and take the first step toward proper management of your finances.

Disclaimer: The information provided on this page is intended to provide general information. The information does not consider your personal situation and is not intended to be used without consultation from accounting and financial professionals. Salman Rundhawa and Filing Taxes will not be held liable for any problems that arise from the usage of the information provided on this page.

Written By:
Salman Rundhawa
Salman Rundhawa is the founder of Filing Taxes. Salman provides valuable tax planning, accounting, and income tax preparation services in Toronto, Mississauga, Oakville, and Hamilton.

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