Cash is the lifeblood of every business. Run out of cash, and your business will be dry and out of blood. you can’t pay your bills or make payroll. Even if you’re not up and running yet and just planning on launching a new business, you’ll need to know how much cash you need to get started and stay in business during those first crucial months.To prevent the horrible situation of running out of cash from ever happening to you, it’s critical to understand how cash is moving into and out of your business. Accounts payable is the total of the bills that your business has, but that you haven’t paid yet.
Accounts payable is considered short term debt and includes things like your business rent, costs to keep the lights on, and anything associated with running your business month to month.
A cash flow statement shows how cash is moving in and out of your business over a certain period of time like a month/quarter/year.This statement is one of three key financial statements for every business—the other two, an income statement (also known as a profit and loss statement) and a balance sheet.These three statements give you the complete picture of your business from a financial perspective and tell you exactly how your business is doing. Account payable is an importnant parameter in the cashflow and balancesheet. Accounts payable is the amount of money that you owe to your vendors and suppliers. Essentially, it’s a total of all the invoices that you have received but that you haven’t paid yet.In your company’s financial statements, accounts payable will show up on your balance sheet as a liability.Ideally, you should keep your business’s financial books organized and enter your bills into your accounting system as they arrive. This doesn’t mean you have to pay your bills right away, but it helps you keep track of who you owe and what your liabilities are.Tracking your accounts payable is a critical component to managing your cash flow. As your business grows, you may be spending money on different services for your business and you will receive invoices that need to get paid. If you can’t manage your debts, you could find yourself in a cash crunch, or worse, defaulting on a debt.Especially when you are growing quickly, you may need to buy more inventory and invest in business expansion at a faster rate than your customers are paying you. This means that you will have bills that come due before you receive money from your customers.In general, having a lower accounts payable balance is better. This means that you are paying your bills on time, and aren’t risking getting into any trouble with your vendors and suppliers.Of course, as your company grows, your accounts payable will also naturally grow as you purchase more supplies and have bigger bills to pay. Don’t worry, though. This is totally normal.If you are growing, you’ll want to track what’s called accounts payable turnover ratio to make sure the percentage of accounts payable compared to your total purchases remains fairly constant.
How to reduce your accounts payable
If your accounts payable is growing and you need help paying your bills, there are a few strategies you can explore to help reduce your AP, or at least manage it better:
- Negotiate with your suppliers:
- Most suppliers would rather see you pay their bills than have you default and not pay at all. A simple call to your vendors to negotiate a payment plan can often help ease the pain. Also, this method can keep you in good standing with your supplier so you can continue to do business with them.
- Encourage your customers to pay faster:
- For most businesses, getting cash in the door from customers is the best way to help pay bills faster. I covered a few ideas in my post on accounts receivable, so take a look at those and see what you can do to get your customers to pay you faster so you can pay your bills and reduce your accounts payable.
- Establish a business line of credit:
- You should do this before you have an accounts payable problem as banks are less likely to lend to you if you already have too much debt. If you do open a line of credit, that can help ease the pain of certain times of the month or year where you have less cash on hand than you normally do. Just be careful not to overextend your business and add even more debt. Instead, think of a line of credit as a very temporary loan that is allowing you to pay your bills while you wait to get paid by your customers.
- Lower your costs:
- This is probably the most obvious option for lowering your accounts payable, but it’s always worth mentioning. When you shop around for different vendors, you might be able to lower your expenses and therefore lower your bills. It’s always good to be on the lookout for better deals for your business, so reserve some time every few months to look at your expenses and see where you might be able to cut costs.