June 28, 2018

Paying your company debts is just as important as collecting your own accounts receivable and they need just as much management.

The good thing is, you actually have a surprising amount of control over how and when your company’s debts are paid and that provides several advantages.

Payment Controls

First, adopt good internal controls for the payment of your bills. You need to reconcile both:

  • Purchase orders with the invoices and statements your vendors send.
  • Accounts payable subsidiary ledgers with the general accounts payable ledger.

Once you have those controls working, consider these ways to effectively manage your company’s debts and maximize your cash flow:

  • Keep as much interest-earning cash in the bank for as long as possible, but not too long. If you don’t already have an interest-earning account, talk to your banker about using a money market account or some other interest-bearing vehicle. Consider using idle cash to pay down your lines of credit.
  • Periodically provide your banker with updated cash-flow projections. An improved cash-flow picture might result in better terms on any open lines of credit. On the other hand, if the projection is less than robust, your banker might increase your line of credit with no bump in the interest rate, depending on the overall financial condition of your firm.
  • Consider borrowing against the cash values of executive life insurance policies to reduce your net interest cost. Life insurance loan rates often are generally lower than bank rates.

And of course, use your suppliers to help finance their purchases, as well as freeing up some operating capital, by taking advantage of favorable payment terms to temporarily free up cash.

Maximize Cash Balances

The more business you give to suppliers, the better the payment terms you should obtain. The goal is to widen the spread between sales revenue and payments, allowing you to maximize the business’s cash balances at very low cost. To that end:

  • Use every possible discount. Have your accounts payable department maintain a calendar-style schedule to ensure payments are made within discount periods.
  • Stretch payments to their latest date.
  • Negotiate extended terms when possible and appropriate. If you’ve been a good customer you might be surprised at what your vendors will agree to.

© 2018