Let me today translate my last article on debtors (receivables) to creditors (payables).
For a kick-off, your enterprise’s outstanding liabilities or debts for goods and services procured from your vendors or suppliers are known as creditors or payables. Payables or creditors management therefore relates to the management or administration of these elements of your business. The elements of receivables, payables, cash and inventory (stock) are critical items in optimizing your working capital, and you can walk tall as an entrepreneur if you are smart in this. Now, you don’t need to trivialize this component of payables in your business. I’m saying this because many entrepreneurs don’t take things like optimizing and proper payables management seriously. Some may even laugh at why I’m making this big business. They assume this just relates to receiving bills which they stash away in some old tray or file for bills, or forward to the accountant, and then the next is payment. This is not a joking matter!
Do you know that trade credit is indeed one of the easiest and vital short-term source of capital for funding your enterprise? Are you aware that more cash can enhance service delivery, reduce costs and improve your business? Do you know that this element of working capital requires efficiency and effectiveness in its management, to save precious time and other resources in the enterprise? If you have a sizeable business and bills flow in good numbers on a daily basis then you might have an idea about what I’m talking about here. Do you know that poor payables management can sometimes eliminate your access to more credit for goods and services you critically need, or even make someone drag you to court and tarnish your business reputation? Has it ever occurred to you that your businesses can lose big money through poor management of payables?
I could ask questions until you get very bored and run away from the article, but that is not my objective. My objective is to retain you to continue reading this blog, as we share knowledge about enterprise management. It might be useful in one way or the other. What I’m saying is that good payables management adds value to your business. It can free up working capital (cash element) to engineer growth and profitability in your business. Receivables management also has an impact on your payables management. You need to strike a balance between delaying settlement of bills to free some cash for your enterprises, and delaying too much to the extent that problems arise in your business because of this. Do you understand me? If your business is a big one (though this term is also relative) you might need to develop a clear strategy to manage and optimize your payables. This may be more complex than those for smaller enterprises.
So, what are these points that can guarantee you the best from your creditors or payables?
- The trade-off between settling bills now or in the future. As I mentioned above, paying bills later rather than now (immediately) help free up some working capital for your business. There are lots of benefits that can accrue to your enterprise if you properly use this free working capital, but I’m not going into the details of all those benefits for now. Nevertheless, I have also seen enterprise with excess cash and they simply miss the vast opportunities that this comes with. While delaying bills settlement is the usual strategy, overdoing this can be detrimental to your enterprise as you could earn for yourself a very bad name. I believe you don’t like fingers being pointed at you because you have held somebody’s money for months! Do you? What about holding supply of goods and services to your company, reluctance to attend to your complain and issues, eroding goodwill etc. that results from such practices? You could even make work difficult for your accountants and other staffs due to overdoing this thing. Don’t you think so? So, my first tip on the best management of payables is that you should strike a good balance between settling bills now or in the future. And when I mean ‘future’ I don’t mean the future as long as six months or one year. Ok? Don’t play with somebody’s cash, as I cannot take responsibility for what he/she will do to you? Understood?
- Understand the scope of creditors or payables management and place the right emphasis at each stage. Again, the three critical stages I wrote about last time regarding receivables, comes back here though in this case we have – vendor selection process, credit procurement of goods and services, and then cash payment or settlement of bills. My dear entrepreneur, you need to identify your core purchases, identify preferred suppliers for the goods and services, while bearing in mind that you avoid over-dependence on one or two suppliers only. Can you try and imagine a situation where you use only one supplier and then something happens that makes that supplier unable to deliver for some months? Come on, you should have clear answers I think. You can get real pain in business due to this. Again, your criteria for vendor selection should be documented. These depend on your need; but please never use criteria such as ability of the vendor to accept one year credit term! If you lack money, consider going to the bank, instead of appearing a bit insane. Ok? You will spoil your good business and reputation. Consider serious factors such as quality, pricing, performance, possibility of rebates or discounts, credibility, contract term etc. Regarding contracts, compare with industry standards, default terms such as penalties and fines etc. It is also wise to let a learned friend (I mean those that read all law books and every other book) take a second look. After those preliminaries, you have the credit procurement itself. Again here, you consider factors such as credit terms and limits, record keeping for creditors or vendors, debt approval process etc. A good vendors’ database and internal controls should ensure you only procure from approved suppliers, and also track every supply and invoices. Determine metrics that help you assess performance, and maximize savings by considering available opportunities. The final stage is the settlement of payables. A robust IT system should be handy. I know some entrepreneurs don’t want to spend money on systems – they rather continue using their manual ledger books (with hard covers) and calculators. That is up to you! Ok? Timely reporting and processing, centralized processing, invoice verification and approval process, adherence to control guidelines etc. can make you steer clear of problems at this stage. There should be segregation of duties, real time reporting and frequent account reconciliations, payments tracking etc. Remember that payables are one area that is prone to fraud, and hence both external parties and your own possibly untrustworthy staffs could try and take advantage of this. Take care! Understanding the scope of payables management, and placing due diligence in all the relevant areas, is another key step in ensuring the best management of your creditors or payables.
- Settling bills or payables and keeping your personal including business name. I would want to believe that keeping your word comes naturally to you. I mean, your personal and business names are much more valuable than that little cash you don’t want to pay. Don’t you agree with me? Never be a hopeless entrepreneur who wants to be chased and threatened before you settle bills. Ok? Don’t use the pretext of optimizing working capital, freeing up cash for business, blah blah blah to avoid paying people. Do you understand me? We all have a good idea of what is normal and what is abnormal, so there is no opportunity to play in other people’s minds. If you have a good system it will tell you what is due for payment at what date. You don’t need to lose sleep over this my dear Entrepreneur. Managing this well gives you time to focus on the real business of business. I hope we are still together. Good systems will tell you all these, including aged analysis of payables, comprehensive payables reporting etc. With this world of first class communication tools such as emails, the old story line that you did not receive the invoice (or the invoice was misplaced and you need another one) belongs to old school. Do you understand? However, if you have suppliers that still send a guy taking days around the city distributing invoices, leave that to them. The date of your receipt of invoices is when you actually apply some goddamn old stamp on that original hand delivered document, acknowledging your receipt of the bill. Isn’t it? Those stamps never leave the office you know! They will be there until the end of the earth – because some people simply like them. They won’t let go. Some laws also demand for them, so they will be with the business community until further notice. Additionally, some payment terms also give your business savings, and you need to explore these! Finally, I would be the last one to advise you to delay settling your bills until you see a lawyer’s demand note or request to appear in court coming. By the time that lawyer is done with you, you would have paid more than twice what you should have paid in the first instance. And then of course the downgrading stares of an attorney to a ‘stubborn creditor’! Come on, Mr. Entrepreneur. You are above that, and please be above that. Ok? You should go there for better reasons.
- Happy suppliers or vendors are very likely to offer you more favourable business terms, including flexibility and prime service. Again, the natural law of restitution that I mentioned in my last article repeats itself here. This is another important tip in the management of payables. It is another tip in best practices in management of creditors or payables. My dear entrepreneur, you might strategically delay settlement of invoices, but you could do it in a very smart way that your vendors always smile. Do you understand me? Keeping your vendors happy through proper management has a positive multiplier effect. With time you will become a reliable trading partner adding value to your suppliers, and obviously they will pass by sharing this added value with you, in terms of more favourable business or trade terms, flexibility in operations to suit your supply or demand requirements, first-class service etc. If you have ever flown first class with a good airline, or seen the special attention given to that exclusive class, then you have a good idea of what I’m talking about here. Exclusive. Priority. Service excellence. Top notch. Now, beyond the airline business, any other business can practice and refine these excellences. So, why not keep your vendors happy? In any case they determine your business. Don’t they? Don’t be a proud, unbalanced and arrogant entrepreneur, shouting any kind of non-sense to your suppliers at will and treating them in any bad way you like. The customer cannot be the king without the suppler first being a king. You can only supply to the customer king, and meet all customer requirements when you have obtained from the supplier. Period!
- Tax and legal implications of payables. Someone said that tax is a necessary evil! Don’t let the tax collectors here us say this. Ok? They may assume we are calling them evil, yet we are simply quoting what someone said many years ago. We want to have clean hands. My point is this, the management of payables has tax and legal implications that you cannot ignore, and you would be wise to take these into account. I have already mentioned the possibility of being dragged into the courts of law by creditors due to poor management of payables. Beyond the normal suppliers of goods and services, the matter can be more serious if there are other creditors such as statutory ones, financiers etc. I guess you are already aware of terms such as business liquidation, receivership, administration etc. These are very painful, though their scope is an entirely different one and I would not want to go into that now. I will plan another article on that much later. Let me talk about statutory payables for now. Do you know that these payables, even if the amounts are not earth-shaking, can be a source of headache for your business. I mean, statutory liabilities such as PAYE, VAT, social security funds, taxes due, property rates, all monies owed to the local and central government etc. need more attention. These are payables, and I don’t want to leave them out, and make you blame me one day because I left them out. These have potential for more penalties, compounded interest, direct debit to your bank accounts by law, takeover of your bank accounts etc. Now, I guess you are a serious entrepreneur who wants to continue doing uninterrupted business, and enjoying your quiet peace. So, take this tip about best management of your creditors or payables seriously. Ok?
- Consider other risks related to payables. Just like I mentioned regarding receivables management, payables management equally have various risk areas associated with it. Aspects such as fraud, paying for air supplies, risk of cash movement (if you are unwise enough to carry big cash around the city to pay bills), delayed supplies and production stoppages etc. In some parts of the world people prefer seeing hard cash you know. While I may not enumerate all these potential risk areas, I believe you can sit down on a good working table, think through it and jot down some of these. They could be broad depending on the kind of business you are doing. Your business risk profiling should bring out some of these elements and enable you plan and prepare for them, should they surface. Of course, a big risk such as discontinued supply due to reliance on one supply line could be disastrous to your enterprise. In fact, if you are not careful, by the time you overcome it all your customers would have moved to another business. Do you understand?
- Consult the experts if required. Again, my last lazy and yet critical tip about best practices in managing payables, is the use of experts. If you don’t have what it takes to optimize management of your payables, to enable your business gain the most and maximize value from this, please consult the experts. My warning is this, identify and consult with good experts, not just any. Don’t blame me. I have met some entrepreneurs who complain very bitterly after they have been taken for a ride by some business ‘consultants’. Be smart! You need to consult first before you can get a good business consult. Don’t you think so?
Please share these tips and best practices for management of payables with anyone or business colleague you think will benefit from it. As I mentioned before, our goal is to develop entrepreneurs who can run sustainable businesses that will have positive impact on humanity. I guess you have found this article useful. Haven’t you? The fact that you have read it until this concluding paragraph shows me that you have got some value from it! I’m assuming that you never jumped to the conclusion after reading only the first paragraph!
With best wishes for a successful payables management in your enterprises, always
The Wise Entrepreneur