Why You Should Consider Paying Suppliers In Advance
Accounts payable is one of those business functions that gets put on the back burner when businesses have a look at how they can improve their functions. Management usually have many other things that require urgent attention, so they leave accounts payable to other ‘qualified’ hands and assume it will be managed in the best way possible.
Capital optimisation should always be a priority for businesses and optimising payables is a great place to start. Many businesses, though, take the approach of extending payables for as long as they possibly can as they reason that this will maximise free cash flow. The problem with this approach is that in many cases delaying payment actually erodes good supplier relationships, which results in slower delivery times, less willingness to fix defects, slower responses to queries, and much stricter and less forgiving payment terms.
Not adopting effective accounts payable processes can have many other consequences on all areas of the business. Some of these consequences arise because of the following reasons:
- Businesses rely too much on manual processes (where errors are much more prevalent) to approve requisitions, scan supplier invoices and issue payments.
- Businesses miss out on great opportunities for early payment discounts by pushing payment cycles to the max.
- Businesses neglect to take advantage of maximum savings through volume rebates or trade spend initiatives.
- Businesses do not have processes and/or systems in place to prevent late payments, under- or over-payments, duplicate payments or missed payments.
One of the most well-known reasons for paying suppliers in advance is the fact that many suppliers offer discounts and rebates to those who do so. This alone can be a great bonus for businesses and can also be very beneficial to start-ups and small businesses who need the extra cash. Below are 4 more reasons why you should consider paying suppliers in advance:
- Paying in advance shows suppliers that you are comfortable with their company and their product and/or service. This strengthens the customer and supplier relationship which can only be beneficial for both parties (this is especially true with new suppliers where you have just started to build a relationship with them).
- It frees up time for the finance department as they do not have to keep track of all sorts of deadlines (this benefit is even more prevalent if you have an automated prepayment system in place, as discussed later). Missed payments will also be something of the past which will release some of the pressure on the finance department.
- Some suppliers add interest to your accounts payable if you pay them late. This can translate into a much bigger expense that could have been prevented by having prepayments in place.
- Should there be a month (or two) where you cannot pay your suppliers, they will most likely be more forgiving and more open to accommodate you, as they know that you have kept to payment terms in the past.
To take full advantage of the benefits listed above, different teams have to work together and collaborate with senior management to make sure a working capital culture is a top priority throughout the company. It is also about more than just making sure invoices are received and processed as quickly as possible, but about adopting a management focus that emphasises the importance of optimising payables and freeing up working capital to fuel growth.
Having a central accounts payable processing and reporting structure in place is the first step towards optimising payables. At the end of the day, such a system also has the added advantage of enabling businesses to accomplish more tasks in a faster timeframe and with much less resources, which ultimately will help in reducing enterprise costs.
DataRapt’s Supplier Prepayments system enables you to control prepayments to suppliers for goods and services. This system provides complete visibility of prepayments and related transactions, and can benefit any company that pays for goods and services upfront.
You can be prompted to capture a prepayment when a purchase order is created or after a supplier invoice is registered. Prepayments can also be posted manually with or without a link to a purchase order or registered invoice. When the supplier’s invoice is captured or the registered invoice is approved, you can be prompted to match their invoice to the prepayment on the fly.
DataRapt’s Supplier Prepayments system lets you have control over your prepayments by:
- Helping to identify your prepayment invoices with dedicated numbering.
- Letting you link your prepayment to the purchase order or registered invoice that initiated it.
- Helping you to make sure that you don’t overpay.
- Ensuring that you post the accounting transactions to the correct general ledger accounts.
- Providing the facility to ensure that the prepayment and supplier’s invoice are matched up.
- Providing a dedicated Prepayments Query.
Streamlined processes and a culture of working capital is all within reach by improving accounts payable processes, setting up management goals that are clear, and consistently tracking key metrics. Approached in the right way, corporate cost management can be strengthened, process complexity can be reduced, and risks associated with routine transaction processing can be minimised.