Accounts Payable refers to all of the money that you owe related to business operations, which need to be paid in the near future. If you owe money on a long-term business loan…only the monthly payment for that particular month will be represented in the accounts payable column (since you don’t have to pay the whole loan that month, just a fraction of it).
While the Accounts Payable account is represented on the balance sheet as one item, it is a cumulative account that collects individual expenses from the cash-flow statement. Day-to-day expense such as utilities, rent, advertising, internet, phone etc. are all accounts that need to be paid monthly. For accounting purposes they are compiled into one account: Accounts Payable.
Minimizing accounts payable is essential for entrepreneurial success in the early stages of a venture. The late Dr. Jeffrey Timmons, a pioneer in entrepreneurship education, referred to successful entrepreneurs as “resource parsimonious”. This is a nice way of saying that they are a bit tight with a buck. Successful entrepreneurs understand that they are not under as much pressure to bring money in to the business if they watch what goes out very carefully.
Sam Walton, founder of Wal-Mart, is a perfect example. Some people would say that the source of Wal-Mart’s competitive advantage is their low price. And, they would be wrong. The source of their competitive advantage is their efficient procurement and distribution system. They save money when buying and distributing products, which allows them to sell products at a lower price. The low price is what the consumer sees, but it is a manifestation of their commitment to minimize accounts payable.
As a business owner, you set the tone. If you watch the costs, and hold employees and vendors accountable for costs under their control, you will see significant improvements in your profitability. If you feel that keeping costs down by being thrifty is a strength…congratulations. You have a trait that has been linked to entrepreneurial success by various researchers.
Keeping costs low can be a challenge for entrepreneurs. Entrepreneurs are optimistic by nature and have high levels of self-confidence. They generally possess what psychologists call self-efficacy, which is the belief that they have the skills and talents to achieve ambitious goals.
While this is a good trait, it can lead to a lot mistakes and bad decisions. First time entrepreneurs are especially prone to self-efficacy mistakes. They incur debt under the assumption that revenue will soon follow. Too often it doesn’t and they are buried under a mountain of debt. Even innovative companies, like Apple, can be prone to incurring costs related to projects that never bear fruit.
Practical Tip: So how do you grow a brand while mitigating costs? There are some proven techniques that really work well for companies of all sizes:
Research & Development – You will likely spend money to test the viability of new products and service, so why not do it as part of a comprehensive strategy. By allocating a specific percentage of revenue (such as 5% of sales) you’ll find your team has more discipline in spending money.
Also, the time you invest in researching various procurement and vendor selection options will invariably reduce your costs. For major purchases, it is a good idea to get 3-5 written quotes. Make your vendors justify their prices and don’t be afraid to negotiate. Also, research what all of the stakeholders you deal with need to make for a profit margin.