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CFO Fundamentals: Your Quick Guide to Internal Controls, Financial Reporting, IFRS, Web 2.0, Cloud Computing, and More by ALLISON I. SHIM, JOEL G. SIEGEL, JAE K. SHIM

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CHAPTER TWENTY-THREE

Management of Payables

THE CFO MUST ensure that a well-managed accounts payable system is in operation. Any warning signs of problems with payables must be identified and solved.

ACCOUNTS PAYABLE SYSTEM

Controlling the cash that leaves the company is as important as controlling the cash that comes in. To achieve control, payables must be aggressively managed in accordance with the company’s financial position and goals. Payment of bills must not be simply made but planned. Above all, payables must be viewed as a flexible system that the CFO can manipulate in response to other factors, such as sales decreases or slowdowns in collections.

A well-managed accounts payable system should:

  • Evaluate cash flow. Every accounts payable strategy should be rooted in the realities of the company’s cash flow status. For example, if it takes 90 days to collect from customers, it is financially self-destructive to pay bills within 45 days. How long does it take dollars spent to be replaced? The CFO should monitor the cash-to-cash cycle representing the length of time elapsing from the expenditure of dollars on inventory to the receipt of cash from sales. Take, for instance, a retailer who buys a product on January 1 and pays for it on January 30; it takes the retailer 60 days from that point to sell that product (which brings the retailer to March 31) and 45 days after that to collect the cash (May 15). The cash-to-cash cycle adds up to 105 days, which is the length of time ...

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