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Accounting

Cash Flow Nightmares: The Power of AP/AR

Most business owners know that doing AP/AR regularly is important, but many don't actually do it. The result? They end up in a cash flow nightmare and have to scramble for funds.

It's a CPA’s job to oversee the company's financial health. The key to managing your cash flow not only lies in building a good rapport with your company's CPA but also be well-informed of every nitty-gritty financial detail that concerns your company.

What is AP/AR?

In a nutshell, AP (accounts payable) is money that you owe to your vendors (suppliers) while AR (accounts receivable) is the money you are yet to receive from your customers.

AP includes expedited shipping costs, credit card fees, bank charges, insurance premiums and engineering expenses related to the construction of a project.

Meanwhile, AR includes items such as outstanding invoices, sales taxes, and cash discounts from customers for early payment.

Why is AP/AR Important?

AP/AR is an integral part of your company's cash flow management process for several reasons:

For one, it helps you manage your cash flow by allowing you to pay bills on time and get paid faster when customers buy from your company. You don't want to be caught in a cash crunch because then you won't be able to pay your bills on time.

Two, it helps you accurately track income and expenses for the company's tax filings at the end of a fiscal year. This is important so that when April comes around again next year, you have all your information ready for filing mandatory reports with federal agencies such as the Internal Revenue Service (IRS).

Three, it prevents you from making unnecessary purchases that will put a strain on your company's cash flow. A healthy cash flow enables you to maintain good relations with your suppliers, who then provide discounts and favorable credit terms.

Strategies to Make AP/AR the Top Priority

1. Track and record all cash inflows and outflows. This means making a list of all the expenses or payments made by your company every month as well as monitoring customer purchases daily.

Having full knowledge of your company's financial situation is the first step. If you leave that to someone else, you won't know what's going on. You necessarily have to be on top of financial matters. Only then can you make informed decisions about how to prioritize your finances.

Consider you want to buy $50,000 worth of construction materials this month, but you have a backlog of outgoing payments of $20,000. The revenues you received this month are $60,000. If you clear the backlog, you won't have enough to buy the materials. If you buy the materials, the backlog would keep building up.

This is the kind of situation (much worse actually) you might face if you're not fully aware of the financial situation. You'll have suppliers constantly knocking at your door and the crisis may very well become a legal issue if it escalates.

2) Conduct regular audits. Most business owners don't do that. If you want to stay atop the cash flow situation, regular audits will help you get there. With these audits, you'll know exactly whether a CPA is doing a fabulous job at maintaining those account books.

Audits are also a good way to find out whether you're not, say, leaving money on the table by letting customers pay late. You don't want them to do that because it's going to put your company at risk of running in unprofitable territory for too long.

When conducting audits regularly and consistently, you'll be able to draw comparisons between periods or different dates as well as identify any trends worth exploring over an extended period of time. These reports will help you make informed decisions about how to manage your business finances now and in future years.

3) Build a rapport with your CPA. Your CPA is the best resource you have when it comes to managing your financials. Your relationship with them will make things easier for both of you.

For instance, they might be able to help determine whether a supplier payment deadline should be extended by and for how long. A CPA knows the ins and outs of your company. They're going to make or break your company's cash flow position.

With a relationship based on transparency and trust. You need a CPA to guide you and advise the direction you should steer the company towards.

For example, in the above cash flow problem, a CPA might advise you to purchase the construction materials worth $50,000 and pay the remaining $10,000 clearing the backlog. Next month, you'll clear the balance $10,000 backlog from next month's revenue stream.

Putting It All Together

Managing AP/AR is a matter of keeping your business afloat. It's an integral part of running the company successfully; it's not something you can lay aside to focus on other areas such as marketing or product development.

You need someone who knows exactly what they're doing, so be sure to choose the right CPA service for yourself today!

See if Dryrun is a fit for you.