💰💰Lord of the Cash
Scanning the headlines of any major news publication and much of the discussion focuses on the “R” word. With inflation still high, the housing market cooling, unemployment low, and the stock market swings there are more mixed signals than ever. This challenging period of uncertainty makes business operations, even just planning, that much harder. This requires an increased focus on strengthening your balance sheet and monitoring cash flows. In particular, this means additional scrutiny on your working capital.
There is a lot of nuance underneath this simple sounding equation. Ultimately we want to ensure that the business can cover near term obligations while maintaining financial strength. You can capture a still photograph of your Net Working Capital by analyzing your financial statements. While that provides a picture of where the business is today, working capital is not just a static number. It’s a dynamic, moving target that you want to proactively manage on a forward looking basis.
Furthermore, changes in net working capital impact cash flow. Collecting customer payments reduces Accounts Receivable (AR) and increases cash while paying vendors and therefore reducing Accounts Payable (AP) decreases cash. In our post last month, Cash is King, we outlined how digital payments can help reduce the complexity and timing of collecting cash from your customers. This month, we’ll now turn to the liabilities side and talk about Accounts Payable.
The logical place to start is by asking, what does your AP ledger look like at any given moment? How do you pay your vendors? How do you decide when to actually make these payments? What recurring payments does your business make compared to one-time? Just like we want to keep AR as small as possible, you want to keep your AP in a manageable state at all times.
While there are many strategic questions on how you manage AP, we’re focusing today on more of the tactical questions for managing your vendors. How much time do you spend receiving and processing invoices? Is there an approval process before payment is sent? How long is that approval process? How are you then remitting that payment? Do you need confirmation of payment? As a business expense, how and where are you tracking the tax deductible status of each expense? How will you handle an audit?
No need for green eyeshades and a jar full of #2 pencils! As you have come to expect from our blog, let’s explore how software tools can work for you. All of the software solutions we talk about here go beyond AP and integrate with all major financial institutions as well as QuickBooks.
Without further ado, we start with Bill.com which is probably the most popular software in this space. It’s a 15 year old, publicly traded company whose name says it all. No matter how you receive a bill, Bill.com has built a simple way for you to put that bill into software. Once there, Bill.com will help you categorize, sort, store, search, and of course actually pay the bill.
Bill.com might be the incumbent, but it has that status because it’s extremely powerful. It has all of the functionality that any billing and receiving department could need. On top of the basics, you can roll your sleeves up and get deep into the invoicing, accounting, tagging, and even receivables part of your business.
Finally, Bill.com has built in reporting. This is just a snapshot of a few AP reports. There are pre built reports and analytics for all activities on their platform. For a first step with AP or AR software, Bill.com is a great place to start.
Note: Bill.com doesn’t cover international payments or complicated compliance or tax needs, but we do talk about a service that does in one of our Tweets.
Where Bill.com broadly targets SMB’s, Avidxchange is focused on the mid-market. Avidxchange’s platform is geared towards streamlining and automating all workflows related to AP. This could be importing new vendors, routing payments for approval, or even automatically making payments. Avidxchange is more of a technology solution for a growing AP department that wants to further reduce paperwork or manual entry between different software systems and vendors.
If you have a constantly growing vendor or payee list and your finance team can’t keep up, Avidxchange can help with that. Similarly, if there are departments or people in your organization with different approval, reporting, or accounting needs, Avidxchange’s platform empowers your team to define and customize those workflows so that employees don’t have to do repetitive, manual work.
A much younger entrant into this space, Airbase brings a cultural shift to business spending in general. Airbase’s platform lets managers define roles and spend levels. Airbase’s platform gives employees the flexibility to make purchases in myriad ways.
A tool like Airbase, or other spend management tools, is designed to make business spend more strategic, help lower overall business cost, and reduce risk. While it may seem like giving employees credit cards is a new level of empowerment, Airbase is further streamlining the approval flows and helping your business be more productive. By presetting approved vendors, or dollar amounts, or other requirements, your employees can go about their jobs without asking for approval or reimbursement throughout the normal course of business.
If you made it this far and are still not sure you need AP software you must have a banana stand stashed with cash somewhere. For those who don’t, consider getting started with the free version of Expensify. You’ll start to categorize and itemize business expenditures. You can start to work with reimbursement and reporting flows to really understand how much time and effort this software can save for you.
Of course, streamlining Accounts Payable is not as simple as becoming a customer of one of these, or any other, AP solution. Net Working Capital is a key part of your business and your business system should reflect that. You’ll have to change far fewer processes if the software system you choose works seamlessly with your banks and other software you already have in place.
In the past, we’ve discussed the value of data. That data comes from software you use. The more deeply you understand these processes, the more data, and hopefully value you’ll extract from this software.
Of course, time and money are your most valuable resources. As your business grows, keeping track of all the cash flows will only get more complicated. The earlier you put software in place, the better positioned you’ll be in the future. If you wait too long, you will have to hire internal employees or an external firm to manage a crucial aspect of your business. The right software, on the other hand, empowers a lean operating team to run the entire finance end of the business. Not to mention the data advantage you’ll have the sooner you get started.