Growing sales and increasing profits each year means a company is on the right path. But even growing companies making profits can get a hit with cash flow issues if their cash flow management is inefficient. To improve cash flow management, companies use accounts payable outsourcing.
For example, if a company’s payables are due before their receivables get credited, they may have to face cash flow concerns. For better cash flow management, companies prefer accounts payable outsourcing.
The Relationship Between Accounts Payable and Cash Flow.
Each time companies purchase goods from a supplier on credit, it is a transaction in account payable. Suppliers allow them to pay the owed amount within a period in the near future – 30 days, 60 days, 90 days, or even more as per their business policies.
Without a credit facility, companies have to pay for all goods and services at the time they make purchases. It ultimately reduces the cash on hand.
- An increase in accounts payable actually leads to a favorable cash flow. Simply because it indicates that the company has not immediately spent cash. Since funds have not left the company account, it is an increase in cash on hand for the accounting team.
- Its opposite is decreased accounts payable. Decreased accounts payable means that cash has actually been paid to suppliers that have decreased the company’s cash on hand. Decreased accounts payable indicate unfavorable or negative cash flow.
Accounts Payable Solves Cash Flow Problems
Companies can create a healthy cash flow by extending the payment period of bills. A long accounts payable period can slow down outflows significantly to improve cash flow.
The average payable period is the best parameter to determine a company’s success in managing its cash flow. It gauges the relationship between a company’s trade credit and cash flow. The formula to calculate the average payable period is Accounts Payable divided by average daily purchases on account. The average payable period estimates the time companies use each dollar of their trade credit. It simply means how long a company uses its trade credit before paying suppliers.
Suppose the average daily purchase on account is $300 per day. The average payable period is 20 days.
If the company can extend its average payable period from 20 days to 30 days, it means deferring $3,000 in cash outflows in those ten extra days. It also means $3,000 of interest-free financing that can be used to make other necessary purchases.
Over time, how a company uses its accounts payable impacts its cash flow significantly.
Thus, companies need to work on maximizing their trade credit to delay their cash outflows to take full advantage of each dollar in their cash flow.
Better Accounts Payable Management
A sharp eye on companies’ payables and expenses is required for sound cash flow management besides managing their accounts receivable. An experienced business process outsourcing (BPO) partner can help companies to improve their cash flow with efficient accounts payable. ARDEM can help established organizations with their Accounts Payable Outsourcing Services. It can automate your Accounts Payable processes for maximum efficiency that results in maximizing sound relationships with vendors or suppliers and maximized payable period, ultimately.
Accounts payable analysts at ARDEM can work in the client company’s system as they have been trained on and have worked in numerous accounting systems. Approach leading BPO companies, like ARDEM, to outsource accounts payable processes and let experts handle the accounts payable processes from receipt, and approval, to payments to improve your cash flow management.
ARDEM provides Business Process Outsourcing and Business Process Automation Services to established companies to help them improve operational Efficiency and Reduce Costs. For more information please reach out to us at pricing@ardem.com or call us at 908-359-2600.
