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Learning to Forecast and Manage Payables

04.08.2020

With the sudden decrease in sales for many businesses, the scramble to figure out what to pay and when is also starting. The news is already covering business owners who are cutting their own salaries and preparing to take more drastic measures if needed. A deep understanding of your obligations and how you prioritize each one, should be considered when making these decisions. Having open and honest conversations with employees as well as suppliers could also create the bridge to make it over these rough waters. Using a forecast to minimize surprises and enable these conversations could still be your competitive advantage. 

Businesses need cash to pay their suppliers, employees and taxes and for financing obligations such as interest and loan repayments. Each payment going out the door meets an obligation to a critical stakeholder that the business could not survive without. Failure to pay has a financial cost such as late fees or penalties, employee turnover and supply disruption. Payables are what keeps a business owner up at night and an area that is managed tightly by the largest of firms because it can be forecasted and used as an advantage for any business.  

Risks to managing payables: 

  • Receiving invoices is manual, and routing for approval has control risks 
  • Purchase orders and contracts may not tie to invoice value or terms 
  • Master data may not match contracts or invoices 
  • Opportunities can be missed for savings or cash flow improvement  
  • Duplicate payments, over/under payments, missed payments and late fees 

Can forecasting really help manage payables?  

Building a forecast can begin to uncover the risks the business is currently exposed to. If the forecast is unstable and highly variable, there are many opportunities and tools that can be deployed to help stabilize the outgoing cashflow. Payables forecasting relies on business maturity of three key business drivers: 

  • Receiving and processing invoices on time 
  • Understanding the supplier base and how materials and services are ordered 
  • Contractual understanding of terms and conditions related to payments 

A model will help narrow down which business driver will have the biggest impact on your cashflow and give you the most visibility into the what cash is going out the door. It may even reveal gaps in understanding the drivers today and open opportunities to dig in before the model is fully operational. 

Manage and understand contract payment terms 

Payment termcan be highly sensitive to negotiate, but as with any contractual term, understanding why they are challenging to negotiate is the base of a contract that works for both parties.  

Both parties should understand their own cash cycle and determine how critical prompt payment is. Take a moment to think about your business’ priorities. Is getting paid on time more important than maximizing margin?

When agreeing to a contract term, make sure to understand: 

Terms & Conditions 

Validation Questions 

When the payment term begins 

  • Does the supplier expect you to pay based on the ship date or the receipt date?  
  • Is there a down payment expected before services can begin? 

Late payment fees or penalties and when they are applied 

  • Is there a grace period that would allow you to reduce the frequency of payment runs? 

What payment type is accepted 

  • An EFT payment will typically settle faster than a check and is more reliable for forecasting 

Early payment discounts 

  • Will you receive a rebate if you pay early? 


Opportunities to manage invoice processing 

Receiving, approving, and paying an invoice seems like it should be a simple process with a clear decision tree, and it can be. However, it can also be manual and a pathway to fraud. Invoice processing is an area with many opportunities to streamline and use tools such as optical character recognition or simple workflow processing to greatly improve efficiency as a first step. Larger organizations with high volume should consider robotic process automation and artificial intelligence. 

By streamlining the invoice process, your business will decrease the likelihood of paying late, and improve forecast accuracy.  

Supplier base and purchasing opportunities 

Understanding what you purchase and how you purchase it can also yield opportunities to improve cash flow. For critical raw materials, tying purchasing closely to the sales and production plans will help both reduce inventory and provide better visibility into payables. For other purchases, consider whether a credit card is an option. Credit cards have benefits such as a single monthly statement, payment terms of typically net 30 and reward programs. There are risks with credit cards as well, so setting guidelines is critical to a successful program. 

Key takeaways 

  • Understanding the terms in your supplier contracts is critical to managing payments. 
  • Master data integrity will further support a solid forecast. 
  • Payables process integrity is within the ability of the business to manage. Quick turnaround to get the invoice received and approved will greatly improve cash forecast visibility. 

For more information on forecasting and managing payables to improve your business’s cash flow, contact Amy Julian, Director, Advisory Services, at ajulian@bswllc.com or 314.687.2314.

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