In the working capital equation, one key area is the managing of Payables which is the creditors or vendors who the company owes money to for the purchases of raw materials or finished goods.

It’s critical to understand that in the working capital cycle/cash conversion cycle, purchasing of raw materials or finished goods is the starting point. Hence, purchasing initiates cash outflows and an over-zealous purchasing department will create liquidity/working capital challenges.

If there is effective managing of payables, this will inevitably leads to effective cash management and in turn enhance the company’s cash position.

Append below a Checklist to assess our competency in managing payables:

• Who authorizes purchasing in your company - is it tightly managed or spread among a number of (junior) people?
• Are purchase quantities geared to demand forecasts?
• Do you buy in bulk or as and when you require stock?
• Do you provide product specifications to your suppliers?
• Do you request for specific delivery terms as to quantity and timing of delivery of goods to your factory or warehouse?
• Do you bargain hard on credit terms?
• Do you use order quantities which take account of stock-holding and purchasing costs?
• Do you know the cost to the company of carrying stock?
• Do you have alternative sources of supply? If not, get quotes from major suppliers and shop around for the best discounts, credit terms, and reduce dependence on a single supplier.
• How many of your suppliers have a returns policy?
• Are you in a position to pass on cost increases quickly through price increases to your customers?
• If a supplier of goods or services lets you down can you charge back the cost of the delay?
• Can you arrange to have delivery of supplies staggered or on a just-in-time basis?
• Do you have a computerized system to pay suppliers?
• Do you attempt to increase the credit quantum taken from supplier?
• Do you negotiate extended credit from suppliers?
• Do you negotiate with your vendors to obtain better prices and faster deliveries?
• Do you use barter to acquire goods and services.?
• Do you make prompt payments only when worthwhile discounts apply?
• Do you ask your main vendors to share in paying freight costs?
• Do you enquire if your suppliers will help with co-op advertising?

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Related Entries

• Managing Working Capital-Accounts Payable
• How Good Is Your Inventory Management?
• Cash Operating Cycle And Ways To Improve Cash Flows
• Simple Illustration Of Computing The Working Capital Requirements
• Credit Management: Proper Documentation