The importance of trade payables within the AP process

The procurement function plays a critical role in shaping vendor relationships. This encompasses contract negotiation to secure the most favorable terms, identifying opportunities to capture early payment discounts, ensuring adherence to agreed-upon payment terms, and establishing efficient processes for timely invoice settlement.

Invoices arising from these agreements with your inventory suppliers fall under the category of trade payables. This differentiates them from the broader ‘accounts payable’ (AP) umbrella, which encompasses all your short-term obligations.

Effectively managing trade payables is a cornerstone of good supply chain management. By ensuring timely payments through an efficient trade accounts payable process, a business cultivates stronger vendor relationships, avoids late payment penalties, and ultimately optimizes its cash flow and working capital position.

Avoiding late payments

One of the most critical aspects of a well-functioning trade payables process is avoiding late payments to vendors. Late settlement risks disruption to your supply chain and cash flow, but also carries significant ethical and financial implications.

  • Strained relationships and disrupted supply chain
    Late payments may sour vendor relationships, potentially delaying fulfillment, creating longer lead times, reducing flexibility, or even causing termination of the business partnership altogether. Strained vendor relationships are likely to introduce significant risk, undermining smooth operations and reliability of the supply chain.
  • Impact on SMEs
    Many businesses that supply large enterprises are small and medium Enterprises (SMEs). These companies often have tighter cash flow and are particularly vulnerable to late payments. According to the UK’s Federation of Small Businesses in 2022, late payments are a leading cause of SME failure, with an estimated 50,000 businesses in the UK alone pushed into insolvency annually due to this issue. This problem is not limited to the UK – it’s a global problem. Research by Intuit Quickbooks in 2021 found that mid-sized businesses in the US were owed an average of $304,066 by late-paying customers.
  • Supply chain disruptions
    When suppliers are forced out of business due to late payments, it may exert a significant disruptive influence on your supply chain, especially for non-commoditized or bespoke inventory items. Finding new suppliers for specialized items can be a lengthy and costly process, further impacting your bottom line.

In short, timely payments through an efficient trade payables process are not just financial best practice, but also a crucial element of fostering positive vendor relationships and maintaining a robust supply chain. Prioritizing timely settlements ensures a smoother flow of goods, contributes to the financial health of your partners, and ultimately, strengthens your own financial position.

Better cash flow and greater liquidity

Beyond promoting strong vendor relationships and a robust supply chain, a prudent trade payables strategy unlocks significant benefits for your company’s financial health through:

  • Improving cash flow – By strategically leveraging trade payables, enterprises optimize cash flow. It is akin to a short-term, interest-free loan from your suppliers. By extending payment terms within commercially viable limits, you essentially hold onto your cash for a longer period. This frees up resources to invest in other areas or simply provides a buffer for unexpected expenses that may arise elsewhere.
  • Reducing working capital needs – As it is the funds available to cover day-to-day operations, working capital represents the lifeblood of your business. Effectively managing trade payables reduces the need for additional working capital by minimizing immediate cash outlays for inventory purchases. Let’s say an enterprise buys fast-moving widgets at $10 each on 30 day payment terms. Selling the widgets on at $15 each within 3 weeks means that it has the cost price and the profit in the bank from sales before it is due to pay the vendor, positively impacting cash flow and working capital, benefiting the entire business.
  • Greater liquidity – Liquidity refers to the ease with which an asset can be converted into cash. A well-managed trade payables process improves your overall financial liquidity by keeping more cash readily available. This can be crucial for seizing unexpected opportunities, making strategic investments, or simply ensuring you can meet upcoming obligations.

Ultimately, a well-defined trade payables process goes beyond simply paying your bills. It’s a strategic tool that fosters strong vendor relationships, streamlines supply chains, improves cash flow, reduces working capital needs, and enhances overall financial health. Optimizing this process allows your enterprise to unlock significant value and obtain competitive advantage.

AP automation keeps vendors happy and your supply chain continuous!

In today’s ultra competitive business environment, chronic inefficiency in trade payables management is simply unacceptable. Accounts Payable (AP) automation directly addresses these challenges by streamlining the workflow for the entire AP workload, including trade payables by:

  • Improving speed and efficiency – Automation accelerates invoice processing by automating data entry, approvals, and payment execution. This ensures timely payments and reduces the risk of late fees or penalties.
  • Enhancing accuracy – Automation minimizes human error in data entry and routing, leading to more accurate payments and reduced
  • risk of fraud.
  • Providing insight – AP automation provides real-time insights into your payables, allowing for better cash flow forecasting and strategic decision-making.

Automating the accounts payable function lets you ensure timely and accurate payments to your vendors, encourages stronger relationships and helps create a more reliable supply chain. Additionally, automation frees up your team’s time to focus on higher-value activities, such as vendor negotiations and strategic sourcing. Ultimately, AP automation empowers your business to maximize efficiency, optimize cash flow, and unlock greater value.