Managing Trade Payables to Improve Cash Flow

Too often companies believe that managing trade payables involves riding their vendors or (stated more accurately) paying beyond terms. This is often the typical big-company approach -- to pay vendors 15 to 30 days beyond terms. Thirty-day terms become 45 to 60. To keep such businesses as clients, you have to tolerate financing their business through your credit to them.

Small businesses can’t afford to pay their creditors this way, as trade credit is often the least expensive form of credit available. Keeping your trade creditors happy is important and will better serve you in the long run than paying them 15 days late. Having a good record of on-time payment with many vendors also will improve your business credit rating. And having a good business credit rating will in turn lead to better terms and more trade credit.

Here are a few creative ways to manage your trade payables by leveraging them without violating your payment agreement terms.

1. Always enter a payable into your accounting system as soon as you receive the invoice. Calculate the due date and plan on paying it as close to the last day possible.
2. Use a company credit card to pay some payables when they’re due. Payables such as utilities, phone, courier services, and other recurring monthly expenses can often be paid with a credit card. Wait until the due date, pay with a credit card, and you can extend the number of days until you have to pay the balance by as many as 25.
3. Use a company credit card instead of a company check to buy materials, supplies, and other items from vendors that don’t extend trade credit. A good example would be an office supplies vendor or home improvement store.
4. Ask for dating terms. For your primary trade vendors that sell you merchandise to be resold, dating terms are customary -- particularly when taking on a new line of merchandise. This is also common for seasonal products. Typical dating terms are 30/60/90 days, meaning that you pay one-third of the amount due at 30 days, another third at 60, and the last third at 90 days.

It’s important to be organized in handling your accounts payable when you’re managing to get maximum leverage. Don’t pay past the due date; use credit cards to extend certain payables for up to 25 more days; and ask for dating terms when appropriate.