Paying your company debts is just as important as collecting your own accounts receivable, and they need just as much management.
First, you want to adopt good internal controls for the payment of your bills, so you need to reconcile both:
Purchase orders with the invoices and statements your vendors send, and
Accounts payable subsidiary ledgers with the general accounts payable ledger.
Once you have those controls working, here are a few ways to effectively manage your company's debts to maximize your cash flow:
• Keep as much interest-earning cash in the company bank accounts as long as possible -- but not too long. Consider using idle cash to pay down your lines of credit.
• Periodically provide your banker with updated cash-flow projections. An improved cash-flow picture might result in better terms on any open lines of credit. On the other hand, if the projection is less than robust, your banker might increase your line of credit with no bump in the interest rate, depending on the overall financial condition of your firm.
• Consider borrowing against the cash values of executive life insurance policies to reduce your net interest cost. Life insurance loan rates often are generally lower than bank rates.
And of course, use your suppliers to help finance purchases, as well as freeing up some operating capital, by taking advantage of favourable payment terms to temporarily free up cash.
The more business you give to suppliers, the better the payment terms you should obtain. The goal is to widen the spread between sales revenue and payments. allowing you to maximize the business's cash balances at very low cost. To that end:
• Use every possible discount,
• Stretch payments to their latest date, and
• Negotiate extended terms when possible and appropriate.