PRIORITIZING AND MONITORING

This is especially true for fledgling business owners
who are often stretched pretty tightly financially.
Entrepreneurs who find themselves struggling to meet
their accounts payable obligations have a couple of
different options of varying levels of attractiveness.
One option is to ‘‘rest’’ bills for a short period in order
to satisfy short-term cash flow problems. This basically
amounts to waiting to pay off debts until the
business’s financial situation has improved. There are
obvious perils associated with such a stance: delays
can strain relations with vendors and other institutions
that are owed money, and over-reliance on future
good business fortunes can easily launch entrepreneurs
down the slippery slope into bankruptcy. Another
option that is perhaps more palatable is to make
partial payments to vendors and other creditors.
This good-faith approach shows that an effort is being
made to meet financial obligations, and it can help
keep interest penalties from raging out of control.
Partial payments should be set up and agreed to as
soon as payment problems are forecast, or as early as
possible. It is also a good idea to try to pay off debts to
smaller vendors in full whenever possible, unless
there is some clear benefit to be had in making installment
payments to them.
Usually, signs of cash flow problems will start to
show up well before the company’s financial fortunes
become truly desperate. One key concern is aged payables.
Bills should never be allowed to ‘‘ripen’’ more
than 45 to 60 days beyond the due date, unless a
special payment arrangement has been made with the
vendor in advance. At 60 days, a company’s credit
rating could be jeopardized, and this could make it
harder to deal with other vendors and/or loaning institutions
in the future.
Outstanding balances can drive interest penalties
way up, and this trend is obviously compounded if
many bills are overdue at the same time. Such excessive
interest payments can seriously damage a business’s
bottom line. Business owners should keep in
mind, however, that it is in the best interest of vendors
and other creditors to keep the fledgling business
solvent as well. Explaining current problems and their
planned solutions to creditors can deflect ill feelings
and buy more time. Some—though by no means all—
creditors may be willing to waive, or at least reduce,
growing interest charges, or make other changes to the
payment schedule.
It is crucial to the success of a small business that
accounts payable be monitored closely. Ideally, this
aspect of the firm’s operations would be supervised by
a financial expert (either inside or outside the company)
who is not only able to see the company’s
financial ‘‘big picture,’’ but is able to analyze and act
upon fluctuations in the company’s cash flow. This
also requires detailed record keeping of outstanding
payables. Reports ought to be checked on a weekly
basis, and when payments are made, copies should be
filed along with the original invoices and other relevant
paperwork. Any hidden costs, such as interest
charges, should also be noted in the report. Over a
period of time, these reports will start to paint an
accurate cash flow picture.
Effective monitoring practices not only ensure
that payments are made to vendors in a complete and
timely fashion, but also serve to protect businesses
against accidental overpayment. These overpayments,
which often take the form of overpayment of sales and
use taxes, can be caused by any number of factors,
including internal miscommunication, encoding
errors, sloppy or inadequate recordkeeping practices,
or ignorance of current tax codes. Internal audits of
accounts payable practices can be an effective method
of addressing this issue, especially for expanding
companies. ‘‘As companies grow, owners tend to
become less involved in day-to-day operations and
relinquish control of some functions to staff,’’ stated
Cindy McFerrin in Colorado Business Magazine.
‘‘Set up systems and procedures in your company that
encourage communication, provide for staying current
with tax codes, and lessen the risk of multiple
payments and other mistakes. Laying the groundwork
for accuracy today can keep you profitable and in
control tomorrow.’’
FURTHER READING:
Anthony, Robert N., and Leslie K. Pearlman. Essentials of
Accounting. Prentice Hall, 1999.
Cornish, Clive G. Basic Accounting for the Small Business:
Simple, Foolproof Techniques for Keeping Your Books Straight
and Staying Out of Trouble. Self-Counsel Press, 1993.
Ludwig, Mary S. Accounts Payable: A Guide to Running an
Efficient Department. John Wiley, 1998.
McFerrin, Cindy. ‘‘Understanding Overpaying.’’ Colorado
Business Magazine. December 1997.