Managing accounts receivable and payable when running your business

Posted by on October 12, 2009 · Leave a Comment 

Barrett Haus

Many high finance types have quoted “Cash is king” when describing various financial endeavors. Well when it comes to running your business the saying rings very true. Most of us have figured out the importance of cash whether running our own businesses or our own households. Just think of how many times we look at our bank balances each month. This article describes techniques you can use to help manage the cash in your business and households more effectively.

Accounts Receivable and Accounts Payable are the first areas any accountant would review when helping a small business with their cash flow. It seems simple enough…get paid sooner and pay out later! But, anyone who runs a small business knows it’s not quite that simple. For example, many of us have had or have a large customer/client who is a chronic slow payer, but does eventually pay their invoices. How hard do you lean on that large customer for quicker payment? It’s really a judgment call that requires business savvy. I would recommend being consistent with any new customer with regards to reminding them of your payment terms. Bad habits are hard to break so you don’t want to set bad precedent by being nonchalant about past due payments.

Accounts Payables is the other end of the cash flow spectrum. Once again, business savvy is required. If payment is due to a vendor with whom you have a personal business relationship with then I always recommend prompt payment. One can assume that if you have developed a solid business relationship with that person/vendor it’s worth keeping. However, there is no need to pay the utility company two weeks early. To have this kind of insight into who’s paying you and who you’re paying requires regular review of the accounts receivable and accounts payable. What’s the best way to accomplish this regular analysis? Use processes and tools! As a business gets started and is growing all kinds of new challenges emerge. Of course with myself having a business background I always considered managing cash flow one of the most critical items. I have come across businesses that were in dire straits because customers had not paid them for work completed. For some businesses with one or just a couple of projects going at any time it’s easy to figure out who is paying on time. But, for businesses with many invoices outstanding at any one time tracking them becomes more difficult. One of the advantages of using Quickbooks or a similar small business accounting tool is the ability to track accounts receivables and accounts payables through invoicing and payments. Invariably, the larger your business is the more critical basic accounting principles become. Using a tool to quickly generate reports showing who owes your business money and for how long is invaluable to managing cash flow more effectively. For many small businesses just tracking the accounts receivable in Quickbooks or a similar software tool is sufficient. The accounts payable process may still be manual. For example, I have recommended to many small businesses that they track their accounts receivable in a software tool but may be able to just use a banking electronic bill pay for paying vendors. This process works for many small businesses. However, this technique may not work depending on the type and size of business and whether you’re required or have adopted the accrual method of accounting.

There are additional areas to improve a business’s cash flow (managing debt, investing, etc.) but a good place to start is two of the most common accounts on the balance sheet Accounts Receivable and Accounts Payable. I will explore some additional areas of cash management in a future article. As always, “I can’t make you save money, but I can help you invest it wisely….” Feel free to drop me a line or send me your comments or thoughts at my email address listed below.

Filed under Finance & Accounting