Managing accounts payable is a perfect example of how thinking strategically as a CFO can pay big dividends for your company.
Very few CFO's or entrepreneurs give accounts payable much thought. As a result, it is typically managed with a level of mediocrity that hurts the company in a number of different ways.
In part 9 of this series, we looked at three key objectives to focus on when managing accounts payable. And we discussed the first point in detail.
- Avoiding the payables cash flow trap when cash gets tight
- Improving vendor relationships
- Learning the right way to extend payment terms
Now let's look at the second important objective in managing accounts payable properly.
Improving Vendor Relationships
The real strategic opportunity here is to use the accounts payable process as a component of your plan to strengthen relationships with your suppliers.
Let's start my thinking about our overall strategic goals (as a company) when it comes to the role of our vendors.
- Accurate and timely deliveries
- Provide consistent quality
- Vendors who are solid financially and well managed
- Excellence in service and attention to detail
- The attitude of going above and beyond to help us succeed
- A vendor that stands behind their products and services and keeps their word
In short, we want vendors that are good at what they do. We want vendors that keep their word and that treat us with respect and integrity. We want reputable vendors who are going to be around for a long time.
Let's Put Our Strategic Hat On
The accounts payable process is one where we interact with our vendors on almost a daily basis. We process their invoices. We process credits and discounts. And we pay them.
So let's do that in a way that is win-win.
Let's manage accounts payable in a way that helps the company achieve its objectives with vendors and in a way that is considered a win for the vendor.
So the question is: How can we take our obligation to pay vendors and actually use the accounts payable process to achieve the company's larger objectives?
Here's some ways we can do that.
Consistently pay vendors on time (or early) – This goes against conventional wisdom with most accountants. Most of us were taught that proper cash management was to try to speed up the collection of receivables (which is smart and must be done wisely) and to slow down the payment of accounts payable. Slowing down payments to vendors as a principle is not wise at all. Of course, when cash is tight, it can become necessary. But it must be done right (my next post in this series will address how that should be done).
Just slowing down payments to vendors as a finance practice is a great way to damage vendor relationships, not build them and make them stronger. You don't want the CEO and others out there working closely with vendors to strengthen relationships and improve the quality of the products and services we buy from vendors while at the same time accounting (or the CFO) is poking a stick in their eye by purposefully paying slow. That wouldn't make any sense at all.
Develop a relationship with the vendor's accounts receivable team – The accounting team needs to develop a strong relationship with the vendor's accounts receivable staff. Especially if your company is growing or has lots of different locations where orders are being placed. The more activity on the ordering and invoicing front, and the more people involved, the more important it is to have developed a relationship so communication is frequent and quick.
Deal with errors or problems fast – You want to constantly teach and remind your payables staff to address problems or errors super-fast. With all the invoices being received, credits being processed, payments being made, adjustments being recorded, you can bet that issues or questions arise frequently.
Periodically remind the vendor's CFO and CEO of your track record – This is what the CFO and CEO can do to gently remind senior management at the vendor that we are treating them with respect. Paying them promptly and consistently is a part of our commitment and how we do business. It also helps ensure that their leadership team knows how we are paying them. Just in case their accounting team or the CFO is not communicating to their management team how we pay.
Done properly, and with some modesty, this can be very effective. It helps set you apart from almost every other customer they do business with.
We are using our accounts payable process strategically by:
- Enhancing credibility and trust with vendors
- Making "deposits" into the vendor/partner relationship account
- Demonstrating our financial strength
- Showing that we are committed to excellence in every area of our business
That's how you help your company achieve its larger goal with vendors.
It also puts you in a position where, if you ever have a cash flow problem or need to ask for favors from the vendor, you are doing it from an established position of credibility and trust. you have more ability to "draw" on the relationship account because of all the "deposits" you have consistently made in the past.
That's the wise approach to managing accounts payable.
I'll show you the right way to extend payment terms (if that ever becomes necessary) in the next post in this series.