Sagely is a business advisory platform connecting small business owners to experts in various industries and fields of expertise. Our Sages help small businesses navigate the everyday ins and outs of starting, running or growing a business. Our customers range from one-person startups and budding entrepreneurs to established small businesses like The Trio Company.
We interviewed John Stahl, Founder and CEO of The Trio Company, a cost recovery firm specializing in accounts payable audits, contract pricing compliance, and maximizing the recovery of lost revenues that occur through the purchasing and disbursement process. Trio’s auditors and proprietary processes help their clients recover tens of millions of dollars a year. With over thirty years of experience and some of the largest health care and retail names on their client list, we convinced John to chat with us about some accounts receivable and payables tips for small businesses.
According to John, "it all comes down to are you paying what you contracted to purchase and are you collecting what you’re owed. Loose accounts receivable management is the Achilles heel of a small business,” causing cash flow issues that can snowball into bigger problems.
Here are John’s five tips to tighten up your accounts receivable and payables.
Tip #1 - Review AR and AP regularly
This does not have to be difficult or time consuming. Most small business accounting software now come with functionality to auto-run these reports on a set schedule and automatically send them to your Inbox. Make use of the alerts, reminders and autopay features built into your accounting system as well.
Tip #2 - Have a system (process) in place to deal with late payers early
Consider offering customers a discount for early payment and incentivize staff handling AR and collections with bonuses. Make contacts and build relationships with AP (and escalation contacts) within your customers’ organization.
Once a receivable hits 60+ days, the chance of collecting the full amount drops significantly.
Tip #3 - Reconcile bank accounts monthly
For small businesses, it is important to personally review bank statements monthly. This allows small business owners to spot irregularities like potentially fraudulent activity, validate data entry, ensure accuracy of financial statements, and monitor cash flow.
It is also important to monitor any checks that go uncashed for over 90-days. When checks go uncashed, it can cause multiple issues - including inflated account balances, unclaimed property compliance and other accounting misbalances.
Tip #4 - Use Purchase Orders
Purchase orders sound like a burdensome extra step, but it significantly reduces the chances of missing discrepancies in receiving, pricing changes, product substitutions, etc. This is extremely important if the person ordering differs from the person that may be receiving the orders.
Tip #5 - Actively manage your vendors
Do an active reconciliation of vendor statements monthly for credits you are unaware of, and review contracts and pricing quarterly. These processes ensure that a small business owner spots mistakes, delays, or changes in pricing quickly, and can look for alternative providers or renegotiate terms. Be bold and ask for early payment discounts or extended terms. It never hurts to ask the question.
AR and AP are key to managing cash flow
The review process may seem daunting, but actively managing AR and AP is the key to good cash flow management in any business. The best way to start is to use the built in features included with accounting software. Set-up time with your bookkeeper or accountant to discuss implementing John's tips, and you'll be an AR/AP master in no time.
For advice on cash flow management, broader financial topics, and other areas of business, sign up for Sagely's Private Beta Waitlist! Be one of the first to experience modern small business advisory that's fast, flexible and affordable.