When streamlining your accounts payable process, you may wonder which is better for your business: holding onto company cash for as long as possible or pursuing early payment discounts from your suppliers? While it may feel like common sense to pay your bills on time, it’s easier said than done. Especially as your company continues to grow, the number of suppliers you’re working with will likely grow as well which means more invoices you need to process and pay. Having a long list of unpaid bills and invoices can have a significant impact on your company’s profitability as well as the relationship between you and your suppliers.
If you are struggling to pay your invoices on time, remember that suppliers may offer you a vendor discount in exchange for paying your invoices early. The other option is to continue holding onto cash until your payment due date. Why might you choose one or the other? Let’s explore the necessary steps and considerations to determine when the best time for your business to pay a supplier invoice is.
What are Early Payment Discounts in Accounts Payable?
Buyers may receive early payment discounts in exchange for paying a supplier’s invoice before the due date. Essentially, a company pays less than the full amount and the supplier receives payment earlier than they typically would — a win-win.
For suppliers, one advantage to an early payment discount is, of course, that they’re paid earlier than they typically would be — this accelerates their cash flow. Another plus is often when suppliers offer early payment discounts, they are rewarded with more business.
On the flip side, the purchasing company benefits from early payment discounts if their primary objective is to reduce the cost of goods or improve their relationship with vendors. However, if their primary objective is to improve cash flow or average days payable outstanding, an early payment discount may not be the right choice and can actually result in a negative impact.
How to Optimize Accounts Payable Cash Flow
Cash flow is one of the most important metrics of a company’s financial performance and it refers to the amount of cash or cash equivalents entering or leaving a company. Without adequate cash flow, a company may struggle to pay its bills on time and create a negative relationship with its suppliers.
Maximizing your cash flow begins with optimizing your accounts payable system. On any balance sheet, accounts payable is recorded as a short-term liability. Over time, if these liabilities aren’t handled properly it can have a major impact on cash flow. However, when the accounts payable system is streamlined and automated, there is one central place for all pending invoices. This paperless AP approach allows users to easily schedule payments and authorize invoice approvals with one click, resulting in less missed payments, and ensuring payments are executed using the correct method. With automation there’s no more printing and signing checks, invoices are paid on time and supplier relationships are improved. Here are just some of the ways an automated AP system helps to optimize your company’s cash flow:
- Stay on top of payments you owe suppliers so you remain aware of cash on hand.
- Speed up invoice processing and avoid late-fees and labor costs using automation.
- Easily schedule when payments go out so you can control when cash leaves your company.
- Improved visibility into the AP process and check invoices that go into the system in real-time.
Key AP Processing Considerations
In order to decide whether or not to take advantage of the supplier’s early payment discounts or hold onto cash longer than warranted, you should ask yourself the following questions:
- How quickly do invoices arrive at your company’s AP department?
If your invoices arrive in multiple formats (email and mail) and are directed to multiple department heads who do not immediately forward those invoices to the AP department, it may not leave the AP department with adequate time to go through the steps required to process the invoice on time. If this is the case, it may not even be feasible to take advantage of the early payment discount.
- How streamlined is your company’s PO matching process?
A streamlined invoice matching process allows your AP department to quickly compare information on the invoice with supporting documentation like the purchase order, receipt, or supplier contract to ensure accuracy. The quicker this process is, the quicker you can finalize payments. This leads to better cash flow.
- What is the state of your company’s finances?
Look at the current state of your company’s finances and how much excess cash you have on hand. Sometimes it’s simply not smart to pay your invoices early — if, for example, you need the cash for upcoming initiatives or in order to meet company goals. If this is the case, it makes more sense to pay right on time.
- What internal workflows need to be met?
It’s likely that your AP department has an established workflow in regard to who signs off on invoices and approves them. This process can be long and tedious if done manually, which makes using an early payment discount all the more difficult.
- When and how is payment initiated?
Consider how long it takes your AP department to get the approval of an invoice and the okay to send out a check, whether it’s by mail or electronically. This can often take longer than expected and hurt the relationship you have with suppliers.
After you ask yourself these questions, you’ll be able to get a better sense of how long your current invoice process is and whether an early payment discount is feasible or is in the company’s best interest. Depending on the state of your current finances, it might make sense to save money and accept an early payment discount or simply pay your invoice on time in full.
The Final Word: Pay Your Invoices on Time
Paying your invoices on time is essential to maintaining good cash flow and strong relationships with your suppliers. Take the time to consider the right invoice process for your company whether this involves using an early payment discount, asking for a net 30, or implementing an automated, paperless, invoice system. With an automated accounts payable system, the manual aspects of invoicing are eliminated, helping your AP department better manage their time, workflow, and incoming invoices so payments are paid on time, every time.