5 min read

Turn Your Accounts Payable into Cash and Rewards

You can turn regular bills from vendors into a stream of funds that can help reduce your expenses, fund free travel or reward loyal employees.
Turn Your Accounts Payable into Cash and Rewards

Typically your invoices and bills will sit in your office or email inbox for 30 days waiting until they are due. There's a way to make money here.

Say the average business has a Cost of Goods Sold (COGS) of 50%.

That means for every $500,000 in revenue a business has, it might expect to pay $250,000 to suppliers. For a $1 million dollar business that amounts to $500,000 paid to suppliers each year. Many businesses will even have a COGS ratio that is higher than 50%.

That’s a large amount of money flowing through the average business, and a good place for the enterprising owner to look for potential improvements. What if you could simply change the way you pay these bills, and get up to 3% back?

Typically you receive invoices and other bills and they will sit in your office or email inbox for 30 or 60 days waiting until they are due. On the other side of the equation, vendors have to wait 30 or even 60 days to get paid when they’d prefer to receive this money as soon as possible.

There is an innovative way to pay your vendors quickly while not impacting your cash balance, and get a bonus for doing it! It can even improve your vendor relations.

Here’s how:

  1. Explore charging purchases from some of your major vendors using a credit card that rewards you with cashback, loyalty points or frequent flyer miles for every dollar you can spend with suppliers.
  2. You then simply pay the card balance in full every month, to avoid any interest charges. This is important. You were going to pay the bill in full in 30 days anyway, so make sure you set a reminder each month to pay your credit card balance in full to make sure you’re not charged the interest.
  3. Because the standard credit card provides 30-days interest free, you only pay your bill in 30-days when you would have paid your suppliers anyway, so your cash position is no different.

Everybody wins with this arrangement:

  • Your vendors improve their cash flow because they are paid at the time of delivery, rather than having to wait 30 or 60 days.
  • You get free travel and rewards spending to attend conferences, charitable events or just to reward staff.

Best of all, we’ve heard that some businesses use the card to purchase enough supplies to earn, on average, a free trip a week. The point is that you are incurring the expenses anyway. Why not get some cash back for your efforts?

WIIFM: What’s in it for me?

Which businesses is it for? This initiative can be adopted by small businesses in any industry that requires regular payments to vendors, and where the vendors are open to discussions. Applicability will vary by country and works best in a country with a mature financial services ecosystem like the United States.

What is the potential benefit? Businesses can reduce eligible expenses by 1.5% to 3% and improve cash flow by up to $3,000 per year for every $100,000 of spending on cost of goods that is within scope of the program.

How much does it cost to implement? Getting up and running requires no upfront cost and minimal set-up time of 5-10 hours working with a financial services provider and vendors. In some countries there can be a small yearly fee involved. Always assess the cost and benefits of any projects against the risk, and get professional advice before proceeding.

How often should I revisit this? Once.

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Instructions for running this initiative

The instructions will help you set up this arrangement, and make sure you have a system in place to pay outstanding balances and avoid interest charges.

Step 1: Research & Planning

Start by confirming that this program would be worthwhile to you, that it is possible to work with vendors this way, and you have the right credit card options available to you in your country and line of business.

  • How much do you spend on COGS per month?
  • If you can get 1.5% in rewards back on 50% of your spending, would it be worthwhile to go through the effort?
  • Do you think your vendors would be open to this arrangement?
  • Are there applicable credit cards available in your country?

You can answer these questions based on your profit and loss statements, desktop research and using knowledge of your existing relationships with vendors.

Step 2: Credit Card Procurement

Before you proceed any further, it’s time to approach credit card providers to see what rewards programs they offer and check the terms to ensure what types of spending is eligible to earn rewards.

  • Make a list of the credit card providers in your market.
  • Research each provider's small business credit card options and the associated rewards program, if any.
  • Check the terms for each provider to determine which type of spending is included in their rewards programs, and which spending is not included.
  • Consider any credit card fees in your calculations.
  • Shortlist your preferred providers and make further inquiries.

By the end of Step #2 you should be confident that you can obtain a credit card for your business that includes a rewards program, and that a large enough proportion of your spending will be eligible to earn rewards.

Step 3: Vendor Selection

In Step #1 you did a quick analysis on your monthly COGS to determine on a high level whether this program would be worthwhile. It’s time to go deeper.

  • Make a list of all your vendors.
  • Sort the list of vendors by those you believe would be open to working with you on this type of program.
  • Calculate a total of your monthly spending with the vendor shortlist, and that you think would be eligible to earn rewards based on your credit card research.
  • Multiply the total monthly spend by the average rewards program offers you researched in Step #2 to calculate your estimated rewards.
  • Perform a final sense check that this program would be worthwhile to your business.

Once you have completed this step, you’ll know whether you can obtain a credit card with rewards, have analysis that suggest this program will be worthwhile to your business (if not, you should not proceed) and have a list of vendors to approach.

Step 4: Vendor Negotiation

It’s time to approach your vendors.

Many of your vendors would find the plan workable. You can test the waters by proposing the idea to your major suppliers to see the reaction you get. They may never have thought of it. Make sure to highlight the benefit to the vendor, that they will receive your payment instantly as opposed to waiting 30 to 60 days.

If enough of your vendors will work with you on this program, it’s time to finish setting up your credit card and get started.

Step 5: Monthly Payment Cycle

Finally, and this part is really important:

Set a reminder in your calendar or on your mobile phone to pay your credit card bill in full each month. Set reminders every month so you're not charged interest

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Key takeaways

Are vendor relationships being actively managed and nurtured, or forgotten? Are you managing your cash position closely? Would a set of initiatives like automation and payables management help you improve your position?

Vendor relationships and payables can be easy and rewarding.

Time to make them your own.

Before you go...

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