With the recent news coming from the financial world, people across the country (and the world) are joining together in shouting this famous exclamation. Energy prices are skyrocketing, unemployment is rising, and the stock market is at its lowest level in years.
While things look bad, there’s no way of predicting how hard this slowdown will be or how long it will last. The best thing AP departments can do is ensure that they are doing everything in their power to meet cash management goals.
During a slowdown, there are some key strategies accounts payable departments can use to stretch their organization’s cash as far as possible. Even if things haven’t gotten too severe for your organization – and they may not – these are techniques that can be used anytime that cash is tight.
Stretching Payment Terms
Instead of paying vendors in 30 days, pay in 45 or 60. AP can use this extra time to earn interest on the cash. However, this strategy can potentially damage relations with your vendors and negatively impact your credit rating. It’s best to tell your vendors ahead of time that you will be stretching terms – preferably in a letter – and let them know why. They may be more willing to accommodate than you think.
Whatever you do, it’s vital to make sure you pay key suppliers first. Key suppliers include any that you must keep happy in order for your business to remain open. When times are tough, professional services such as outside lawyers’ fees are at the low end of the priority list.
Capture Early Payment Discounts
It may seem contradictory to recommend paying invoices early when times are tough, but the savings typically make up for shortening your days payable outstanding. Earning a 2 percent discount on a large bill could potentially save your organization hundreds of thousands of dollars.
Invoice discounts are especially beneficial to organizations whose short-term investments yield a low return on cash. However, organizations facing a severe cash crunch may be unable to pay invoices soon enough to capture discounts.
Strategic Sourcing
Conduct spend analysis and find out if you are buying similar items from multiple vendors. You may be able to whittle your number of suppliers down and secure bulk discounts from the ones you keep. Several years ago, the University of Maryland canceled all their contracts with Coca-Cola and bought only Pepsi. Pepsi gave the university a bulk discount and an up-front cash bonus.
These are just some ideas for surviving a potential recession. There’s no telling how the recent Wall Street bailout or the outcome of the upcoming presidential election will affect the economy. If I knew which way the wind was going to blow, I’d be a very rich man. Besides, even if your organization doesn’t feel the brunt of the credit crunch, then perhaps these tips can simply help you better manage your cash.
Patrick Harbin is Editor of The Accounts Payable Channel and Associate Editor of The Accounts Payable Network.
