Running a company’s day-to-day operations takes significant time and attention. Accounts payable often take a back seat to more pressing matters, such as growing revenue and addressing human resource issues. However, most companies juggle payments to various suppliers, service providers and other vendors. As a result, this working capital account can have a significant impact on cash flow, profitability and even fraud risks. Here are some best practices to help you take control of your purchasing and payment processes.
Perform Due Diligence on New Vendors
Strong payables management begins before the first invoice arrives. When selecting vendors, basic due diligence can prevent costly surprises. Start by asking other business owners or your professional advisors about their experiences with a payroll or software provider, cybersecurity firm or benefits administrator you’re considering. Were implementation timelines realistic? Did pricing increase after the first year? Was customer support responsive?
Request references from businesses similar in size and complexity to yours. For a larger commitment, consider a product demo, trial period or pilot program before signing a long-term agreement. If multiple departments (for example, finance, operations and IT) will use the vendor’s product or service, involve representatives from each department involved in the evaluation. Your staff’s experience may differ significantly from what’s presented during the sales process.
Formalize Policies and Oversight
Implement clear policies and procedures for vendor onboarding and invoice approval. Creating preferred vendor lists can reduce “maverick” buying. This might happen, for example, when employees sign up for software subscriptions, consulting services or online tools outside established procurement channels.
Maintain a centralized database of key contract terms, including payment schedules, renewal dates, cancellation provisions and pricing adjustments. Well-defined onboarding procedures also help reduce the risk of vendor fraud, including fake vendor schemes or unauthorized changes to payment instructions.
Regularly reviewing vendor contracts can help you identify opportunities to renegotiate pricing, consolidate services and eliminate underused subscriptions. It also helps prevent duplicate payments, unauthorized charges and billing errors.
Balance Timing with Vendor Relationships
Too often, businesses delay vendor payments as long as possible to improve short-term cash flow. However, this reactive approach can backfire if it damages vendor relationships.
For example, consistently paying a key inventory supplier late may result in tighter credit terms or shipment delays. Paying an IT provider or marketing agency slowly could affect responsiveness or service levels. A proactive approach helps you strike a balance between optimizing cash flow and maintaining strong vendor partnerships.
It’s also important to evaluate early payment discounts or prepayment incentives. These options may make sense if you have available funds and the savings outweigh the opportunity cost of paying sooner.
Leverage Technology to Improve Visibility and Control
A streamlined, paperless process can increase efficiency, reduce processing costs and shorten invoice approval cycles. Automated systems can route invoices for approval based on dollar thresholds or department budgets. Cloud-based dashboards provide real-time visibility into outstanding obligations, allowing you to forecast short-term cash needs more accurately.
Many systems also include audit trails, user permissions and segregation-of-duties controls that help reduce fraud risk. For instance, some systems may prevent the same employee from setting up a new vendor and approving payment. Although there’s an upfront investment in software and training, the long-term gains in efficiency, visibility and control often outweigh the costs.
Give Payables the Attention They Deserve
Accounts payable is more than a clerical function. A disciplined purchasing and payment strategy can improve cash flow, reduce unnecessary spending and strengthen vendor relationships. Contact Hood & Strong for help assessing your processes and identifying opportunities to enhance operational efficiency.
