5 Ways SMBs Can Save Thousands Annually on Accounts Payable

Last Updated: October 29th, 2021
Researched and Written by: Adam Bluemner

Most small business leaders don’t spend any more time than they have to thinking about accounts payable work.

It’s understandable. Paying the bills isn’t much fun. It’s also one of those purely administrative tasks that doesn’t directly create value for the business.

Automatic as it might be though, the get-in, get-it-done, and get-out approach to accounts payable has a downside.

We’ve had a clear view into thousands of accounts payable processes over the years in our role as software matchmakers. Most AP processes we encounter are far from efficient. The same business leaders who share the details of inventive workflow solutions for billing or production or project management, often describe rudimentary AP set-ups that tie up employees with busy work and still leak hard-earned revenue.

Poor AP management is a problem that tends to persist for years at a time, slowly siphoning profits off the bottomline. Organizational dynamics are usually the culprit. Here’s the formula: Upper management is too busy with more strategic issues to prioritize a fix to bill paying. Meanwhile, junior staff members fear optimizing themselves right out of a job. It’s a catch-22 that’s a recipe for prolonged inefficiency.

The irony is that with a bit of attention, many elements of AP work are easy and inexpensive to automate.

So for companies who not only want to pay the bills, but minimize the cost of doing so, here are five simple savings steps to implement:

1 Take Advantage of Interest Earning Opportunities via Timing Payments.

How does your company balance meeting payable commitments while maximizing the amount of liquid assets held in interest earning positions?

Or to say it plainly, are you letting money slip through your fingers by paying the bills earlier than you need to?

It might feel nice to slice open the envelope, read the bill, and cut an immediate check to cover it, but it’s bad business. Fortune 500 companies do not manage their short-term vendor debt obligations this way–and neither should any small business.

The maximum possible amount of interest that can be earned doesn’t just depend on the total value of a company’s cash assets. It also depends on the amount of time those assets are actually in the accounts that pay interest.

The challenge is that in the small business world, people wear lots of hats. Having to remember to send payments later in order to keep cash in interest earning positions can seem burdensome. It really doesn’t have to be though.

There’s a wide array of software products that support not only electronic payments (in both ACH and credit card formats), but advance timing of these payments. Will you pay more for a programs that offers this capability? Sure. But the cost should be far less expensive than turning over the interest that your company should be earning to your suppliers year after year.

2 Take Advantage of Early Discounts.

Of course, there are times when making early payments does make a ton of sense.

It’s easy to underestimate the impact that those 1 or 2 percent early payment discounts can have. But taking advantage of them adds up.

If you do the math on the effective annual interest rate on making an immediate payment for a bill with 2/10 NET 30 terms, it works out to around 36.7%. Yep. Compounding interest does some pretty amazing things to numbers. (Just ask the credit card companies.)

Taking advantage of early discounts is much easier with the right type of software system in place.

In fact, all your software needs to be able to do in order to support a reliable system of notifications for early payment opportunities is:

  • Allow for a field in the vendor database that identifies if early discounts are supported
  • Trigger a notification when an invoice is entered for a supplier supporting early payment discounts.

It’s not particularly complicated to access these discounts, but they remain chronically underutilized. Research suggests that as much as 50% of B2B early payment discounts go uncaptured.

3 Avoid Late Payments.

You may have noticed a bit of a theme developing when it comes to the importance of timing your payments. Well, we’re not quite done with that topic.

There’s one more important timing related point to make about accounts payable optimization: Make sure to avoid late payments at all costs.

Again–it’s not complicated–but so critical.

There are an estimated 130,000 American workers employed in the $100B+ credit collection industry. They’re not all working on recovering consumer debt, either. There are plenty of collectors calling on businesses facing unnecessary interest payments and penalties because of mismanaged accounts payable.

Do you have an idea of how much your company pays in late fees each year? Many small business leaders don’t.

Late payment problems often go unaddressed because they can be tough to spot in the records. Many of the inexpensive accounts payable software programs on the market lack the ability to describe payment splits on individual expenses (ie, to differentiate amount paid against the principal and interest). Without payment classification and simple statistical accounting tools to help bring individual late payments to light, late payment fees can hide in unexamined accounting records.

4 Pay Vendors by Their Preferred Method.

Not all payment methods are created equal.

In fact, many suppliers offer discounts for customers who pay via a preferred payment method. Why do they care? Reasons for the vendor’s payment preference might include making administration easier, preventing customer collection issues, and avoiding processing.

In particular, ACH payments are popular with vendors because they allow them to avoid the typical 3% fees charged by their payment processing provider.

Taking advantage of preferred payment method discounts makes good business sense–and it’s not hard to ensure a consistent system that helps make sure it happens reliably.

Accounts payable software that makes it easy to identify vendors that support payment method discounts and which triggers reminders to users provides a pretty painless way to chip away at total accounts payable costs.

5 Eliminate Unnecessary Administrative and Processing Costs.

Accessing discounts and avoiding late payments are not the only ways to save when it comes to accounts payable.

Time is money. Making accounts payable as efficient as possible is a direct route to improved financial performance.

If spending less time administrating accounts payable doesn’t directly reduce labor costs, at the least it frees employees to spend more of their time on revenue generating activities.

It’s a sunk overhead cost any time an employee spends time:

  • Transferring data that was already entered in a PO into an AP record
  • Manually matching a PO to a vendor invoice
  • Re-entering data from vendor supplied documents into notes, instead of just storing the document in an attachment

It’s a sunk cost because there are technologies that can do each of the above tasks automatically.

How much of a difference does efficiency make in terms of cost savings? Consider this: Research has indicated that companies spend anywhere on average from $4 to $23 in costs processing each invoice they receive. Multiplying those figures times 10, 100, or 1,000, or however many payments need to be processed each month reveals exactly how important being on the low side of the scale can be.

Software is no substitute for intelligent management, but on the other hand, capable software can do some things that people can’t. Seamlessly transferring data between purchasing and AP systems, automated electronic reconciliations, and organized document storage are three pretty good examples of the critical role software can play toward ensuring efficient payables management.

For more information on optimizing accounts payable via accounting software, check out our accounts payable software guide or use our free software matching service to discover the best options for your needs.

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