CAT / FIA FFM Syllabus A. Working Capital Management - Accounts payables - Notes ^{1 / 4}

is money owed by a business to its suppliers shown as a liability on a company's balance sheet.

Accounts payables include expenses such as:

• taxes

• insurance

• rent

• mortgage payments

• utilities

• loan payments

• interest

Monitoring accounts payables

Every business should keep a reasonable balance between the money coming into and flowing out.

It is crucial to the success of a small business that accounts payable be monitored closely.

Entrepreneurs who find themselves struggling to meet their accounts payable obligations have a couple of different options:

1. Don’t pay off debts until the business's financial situation has improved

   Disadvantage: delays can destroy relations with vendors

2. Make partial payments to vendors and other creditors

   This good-faith approach shows that an effort is being made to meet financial obligations

   It can avoid interest penalties from not paying. 

   Partial payments should be set up and agreed to as soon as payment problems are foreseen.

Aged payables

One clean sign of cash flow problems is an increase in aged payables. 

Aged payables are those for which the due date has passed. 

Bills should never be allowed to be more than 45 to 60 days beyond the due date unless a special payment arrangement has been made with the vendor in advance. 

At 60 days, a company's credit rating could be jeopardised; this could make it harder to deal with other vendors and/or loaning institutions in the future.

Outstanding balances can drive interest penalties way up.

Such excessive interest payments can seriously damage a business.

Payment method - Direct Debit

Direct Debit is the way for you to pay regular bills.​​​

1. Instruct your bank

   A Direct Debit is an instruction from you to your bank. 

   Give them the details such as: 
   - amounts
   - dates
   - receiver 's details.

2. Suplliers get paid

   Your bank authorises the organisation you want to pay to collect varying amounts from your account.

   The money is deducted automatically.

Example 1

A company has the following non-current assets:

2015: $100,000
2016: $200,000

Depreciation for the year 2016 is $50,000.

No disposals were made in the period.

Whats is the current figure for cash purchase of NCA during 2016?

• Solution