The global pandemic has sparked major shifts across every facet of life. Businesses, in particular, are facing a bleak outlook, with over 100,000 American small businesses likely to close down forever as the nation’s pandemic toll escalates. Currently, many small businesses face much larger and complex barriers to stay afloat than they once did. Managing accounts payables during a crisis like a pandemic can be tricky: it requires the right judgment for paying your suppliers at just the right time. As a business owner, you don’t want to pay them too early, but also not too late.
Discovering the right balance will not only require a thorough understanding of what accounts payable is, but also understanding cash flow, increasing transparent communications with suppliers, negotiation skills, and the ability to let go of the familiar.
What is accounts payable and why is it important during a crisis
It’s no surprise that the COVID-19 crisis has heavily affected cash flow and supply chains for every business—large or small.
By definition, accounts payable is money owed by a company to its creditors. In simpler terms, it’s cash owed to suppliers. This amount is shown as a liability on a company’s balance sheet.
Paying close attention to and understanding accounts payables during a crisis is key to managing cash flow—and to avoid shutting down forever. After all, staying on top of cash flow means thoroughly understanding how much cash is going in and out of your business, and making adjustments accordingly to avoid bankruptcy.
To help small business owners get started, we’ve rounded up 4 actionable steps to help manage your accounts payable during the pandemic.
1. Examine cash flow
Cash flow is a major problem for small businesses who don’t take the time to understand it. And it’s even harder during a crisis. 82% of small businesses fail due to poor cash flow management or a poor understanding of it. The bottom line is that if your accounts payable —also known as expenses—exceed your cash, then you have a problem.
How to start: Focus on the basics. Start by running new cash flow projections to estimate how much money you expect to flow in and out of your business during the crisis. Revisit your current business plan and make any changes with the current economic crisis in mind.
After all, your goals for marketing, profitability, and priorities may no longer look the same. In a time of a crisis, focusing on increasing cash is key and the best way to start is to examine your cash flow. Lastly, look to accounting software to help boost your business cash flow. Accounting software can help you stay on top of your cash through intuitive dashboard reporting and by slowing your accounts payable and improving cash inflow through smart invoicing.
2. Keep communications transparent with existing suppliers
Prior to the global crisis, relationships are the lifeline of any business. During a crisis, transparent communication with your suppliers is key to managing your accounts payable. If your business is experiencing a rough patch, it might be a good time to approach suppliers with new terms.
Don’t be afraid to ask the question. Let your suppliers know that cash is tight, or that your staff needs to be paid first. As tough as those conversations may be, it needs to happen.
How to start: Browse through your current list of suppliers to identify suppliers with the longest, and strongest relationships. Then take your negotiating skills to use!
“Look to those firms you have a long-term relationship with already, and the firms you know need your business,” says Giovoani de Silveria, Director of the Canadian Centre for Advanced Supply Chain Management and Logistics at the Haskayne School of Business in Calgary. “They’ll be more likely to negotiate.”
For example, if you already have plans for a new and ongoing project with a supplier prior to the global crisis, you might want to consider asking them for a bulk discount.
3. Request for new payment terms
If things are really tight, then ask your supplier for new payment terms. Whether that’s changing a 30-day payment term to 60 or 90 days, the worst response is a “no.” There’s no harm in asking.
If this conversation is with a long-term supplier whom you have a good relationship with and is doing financially alright, then new payment terms might be a viable option.
4. Consider shopping around
During a crisis, there may be suppliers that don’t hold up their end of the bargain. Whether it’s quality problems, delayed shipping, or other inventory-type issues, it can happen. But this can also present itself as an opportunity to negotiate better terms.
If other companies in your industry are not experiencing the same issues, and your supplier isn’t open to working with you to solve the issues, then it could mean two things. One, that they have a cash flow problem themselves and two, they don’t plan on fixing things in which case you should move on.
Ending a relationship with a familiar supplier may feel like a hard decision. After all, it’s never easy leaving what’s familiar. If switching suppliers never crossed your mind before, then now is the time to consider it. Ask around, do the research, and approach with a clearly documented request for proposal. If other companies aren’t having this problem, then there are definitely options out there for your business.
Get on top of your accounts payable now
If your business is struggling like many others during this global crisis, then perhaps it’s time to take a close look at your account payables. Understanding what it is, and how to address it using the steps above, can significantly increase the odds of your business to stay open during and after the economic downturn.
Ready to improve your accounts payable management? Kashoo makes it incredibly easy to stay on top of your numbers and better manage your cash flow. Try us free for 14 days today and see why thousands of small business owners choose us over the big guys!