Optimise Payables to Improve Cash Flow & Working Capital

Many times, people consider working capital separately from accounts payables and try to manage them independently. However, in reality, they are interconnected, and every company should strive to leverage credit terms under payables to finance their working capital. Actual growth depends on how efficiently we leverage the working capital hidden in accounts payables. 

This article discussed how you can optimise payables to improve cash flow and liquidity of working capital.  

Why are payables key to cash flow management?

Accounts payables (or payables in short) are liabilities for companies. It refers to the amount a company owes to its suppliers for goods and services purchased. Paying off such dues without delays improves a company’s relationships with its suppliers and vendors, opens up access to better pricing, assures timely supplies in future, and reduces operational stresses. However, it also affects the cash flow and liquidity of working capital in the short term.  

As per the standard practices in Business-to-Business (B2B) sales, a company can choose any of the following strategies for clearing its payables:  

1. Make purchases on credit but pay early - This helps claim early payment discounts on total payables. 
2. Pay on due dates as per the credit period - The company forgoes discounts. Still, it gets to retain the cash for a longer duration and manage the cost of working capital financing effectively.  
3. Negotiate extended payment terms - It may increase the costs of purchase; suppliers may demand assurance about larger values in future transactions.  
4. Paying late without negotiation - This compromises business reputation, supply disruption in future and penalties.  

The factors that mainly influence the choice of any of these strategies to clear payables are as follows-

• Cash flow situation of the company - It is the most crucial determinant. When cash is scarce, companies opt to allocate it to more critical operational expenses. 
• Cost of working capital vs. discount on early payments—If the discount is more than the cost of financing working capital, then it is profitable to pay early and claim the discount. If a discount is insignificant, paying early does not justify the costs of foregoing cash early.  
• Value of a particular invoice payable—Many companies maintain a policy of clearing payables for lower-value invoices and claiming the full credit period for larger invoices to maintain a steady cash flow. 

Either way, cash flow management becomes the critical concern behind how a company chooses to optimise its payables and for working capital optimisation. 

Challenges in traditional payables processes

Traditionally, the accounts payable (AP) process has been linear and human-intensive. Individual sub-processes are performed sequentially to clear suppliers’ dues in a timely and accurate manner. Such a process involves-

• Issuing purchase order (PO)
• Receiving ordered goods and services 
• Accepting invoices and capturing the details 
• Verification and validation of captured invoice data 
• Ledger posting of invoice details 
• Approval for payments to invoices 
• Scheduling and processing payments to payables 

 Such a traditional payables processing workflow suffers from several challenges and makes working capital optimisation difficult. Let us understand these challenges. 

• Time-consuming - 

Traditional payables processing involves too much involvement of manual interventions, sometimes requiring multiple cross-verifications to ensure data accuracy. This ends up wasting precious time that could be used to negotiate better credit deals with suppliers. With an increase in business scale, such delays may result in even greater costs, including lost discounts and additional interest payments on financing working capital. 

• Prone to human error - 

Companies relying on manual scrutiny to avoid invoice fraud often encounter common human errors, such as miscoding invoices, duplication, and typos in datasheets. These errors result in a lack of confidence in using payables data for forecasting and cash flow planning and undermine management’s ability to optimise payables to improve cash flow. 

• Lack of visibility over the opportunities 

Traditional payables processing also limits management’s real-time visibility over total outstanding invoices and current cash flow status. Without such real-time visibility, it becomes difficult to negotiate suitable terms for payables, like optimum credit periods, early payment discounts, credit period extensions, or better terms for financing working capital.  

What does “Optimised Payables” mean?

Optimised payables as a strategic management of AP goes beyond the traditional practice of invoice verification and processing payments. It transforms an AP workflow to achieve the best financial outcomes for a business. 

The key objectives of an optimised accounts payable working capital strategy are, 

• Enhancing real-time visibility over payables outstanding and cash flow with data accuracy. 
• Maximisation of cash flow through strategic timing of clearing payables.  
• Minimising the costs of processing each invoice through the AP workflow. 
• Saving costs through claiming discounts and minimising penalties on late payments.  
• Strengthening business relationships with suppliers.  

How do optimised payables improve working capital?

Managing payables optimally can improve working capital optimisation in several ways, including, 

• Reducing dependencies on short-term loans for financing working capital needs. 
• Reducing the costs of materials by capturing attractive early payment discounts in a timely manner. 
• Negotiating better credit terms without compromising the costs of purchase. 
• Improving current cash holdings through increasing DPO (days payable outstanding). 

How Clear Helps Enterprises Optimise Payables?

Clear offers the best AP automation software in India. Elevate your accounts payable with AI automation. Get vendor delight, working capital visibility and unrivalled process quality.

Why should you choose Clear Accounts Payable for your enterprise-

• Visibility on working capital: Get actionable insights
• Onboarding vendors: Maintain good vendor relationships
• Validation & compliance: Checks for invoice/vendor compliance
• Seamless ERP Integration: Effortlessly sync data
• Invoice Digitisation: Automate invoice capture with OCR
• Quick Approvals: Process invoices faster with touchless approvals