Resource Corner

6 Money–Saving Strategies for Small Business Owners

Learn how mastering your payables can help save time and money.

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Small businesses already have a full plate to manage and limited resources to do so. On the running to-do list that every small business owner keeps close at hand, payables are never far from the top of the list. Getting your accounts payable (AP) right in your business can lead to better vendor relationships and the ability to run your business in a more cost-effective manner. In fact, businesses can reduce their processing costs by 66% with more effective AP processes.

Implementing payroll strategies and creating an efficient system for paying suppliers and vendors can be straightforward, and eventually lead to your business saving both time and money. 

Your Business’ Sweet Spot

Having sufficient cash reserves has many obvious benefits. It can save you from over leveraging and, most importantly, allows you to  maintain trust with vendors and employees — 32% of customers say they’ll stop doing business with a company if it makes late payments.

One way to determine your business’ cash sweet spot is looking at the days payable outstanding, (DPO) or accounts payable (AP) days on hand. The DPO is the average number of days it takes for a business to pay their invoices and debt obligations. For example, a DPO of 15 means that a business takes an average of 15 days to pay its invoices. 

There isn’t a set number as to what counts as a good DPO for your business, as it can vary depending on factors such as your industry and how competitive your operations are. Ideally, your DPO should be longer than your days sales outstanding (DSO) because that leaves you with more time to collect your cash before you have to pay your expenses. 

When determining your ideal DPO, consider factors such as how much time you want between receiving payments and paying your obligations, as well as any short-term investing activities you want to make. More time with your cash means more time to strategize how to use it most effectively, and cash is the lifeblood of your business. Be sure to run an accounts payable audit to see where your business currently stands.

AP Best Practices to Implement

Whether you want to increase your DPO or continue to tighten up your AP processes, there are several best practices you can implement that can save your company both time and money. Some may take less time, such as implementing the right kinds of technology. Others take a more long-term approach like building relationships with vendors and your clients’ AP teams. 

Prioritize invoices and expenses 

Paying on time is important, but prioritizing the more key ones in your business can help your organization thrive. Aside from employees, look at your list of vendors to see which ones are essential to your daily operations — consider paying these well within their due dates or earlier. 

Ed Daugherty, Managing Partner at Intellapro, prefers to pay all vendors at his company sooner to help ensure strong long-term relationships. It keeps things running smoothly, and being proactive, when it’s possible, helps them save time and money.

“I’d rather pay our vendors sooner, sooner than our competitors even, because we increase our chances of getting quicker and better service,” he says. “Also, if we ever need a favor down the road like a discount or extended payment terms, our vendors may be more willing to help out.”

Paying employees on time is also crucial because your team is the backbone of your business. For Daugherty, who oversees temporary workers as part of Intellapro’s operations, late payments could mean staff leaving for a competitor. 

Establish controls

Creating more efficient processes to ensure the accuracy and validity of your financial statements helps to prevent fraud, reduce human errors, and prevent missing or late payments. By creating an efficient system of checks and balances with your AP team, you have several ways to trace any potential errors and decrease both internal and external sources of risk. 

Types of accounts payable internal controls your business can implement include:

  • Adopting as many paperless documentation and processes as possible

  • Checking files to ensure there aren't any duplicate payments 

  • Verifying accuracy of invoices before payment 

  • Recording payments before and after invoice approval 

  • Segregating duties so the same person isn’t creating and approving invoices

  • Consistent verification with vendors on potential updates or changes to payment information

  • Automating processes, with human review, for discrepancies and trends

Negotiate payment terms for your optimal buffer

If you don’t have enough of a buffer between DPO and DSO, negotiating extended payment terms with your vendor can give your business some breathing room. Being able to do so means being on good terms with existing vendors. How you negotiate these terms is up to you, but consider how long you’ve been working with them and how close you feel with their staff. Even if you can’t make permanent changes, negotiating extended payments terms on an individual basis beforehand is better than missing a payment.

Look for discount solutions or vendors with lower costs

In addition to asking for discounts with existing vendors, consider shopping around for other options to see if your business can reduce overall costs. The savings can give your company the buffer it needs to be able to meet its AP obligations.

Build relationships with other AP teams

Daugherty suggests treating your client’s AP team the same way you would their sales team – build relationships. That way, it’s easier if you need to boost your cash flow.

“If you have a relationship with the AP team it’s easier to call them up and ask if the client can pay the bill faster and put you on the top of their list,” he says. “Building relationships can be as simple as giving them gift cards or sending messages when it’s someone’s birthday, since it can be unusual for companies to communicate like this with AP teams.”

Keep track of disputes

Keeping track of communication with vendors helps to ensure your business can maintain its cash flow and remain in good standing with vendors. It can also prevent duplicate payments, wrong payment amounts, and having proof you are making every effort to continue a good working relationship. Automating an invoice dispute resolution process can make it more efficient for your AP team. 

Turning to Lending Solutions

Optimizing your AR can help with your business’ overall cash flow. However, it may be necessary to seek outside funding to bridge the gap between DSO and DPO, or to help with company growth or investment opportunities.

Whatever the amount and purpose, look for a financial institution that works as a true partner with you and your business needs. A bank that’s the best fit will take the time to understand your business and industry inside and out, streamlining the underwriting processes. Running a business is stressful enough without worrying about funding. Taking the time to seek out a reputable financing partner that can help to streamline and grow your operations.

Contact us today to see how we can help you be on your way to mastering payables.
All content is for informational purposes only and does not constitute legal, tax, or accounting advice. You should consult your legal and tax or accounting advisors before making any financial decisions.