Property management is a difficult job, and a variety of factors have come together in 2023 to make it even more challenging. Rising inflation, increasing regulatory concerns, rising interest rates, and delinquencies are problems that must be navigated. But the story doesn’t end with mounting pressures. The industry is also seeing a rise in possibilities.
Roughly half of all residential property management groups view delinquencies and inflation as their most significant challenges. However, a slightly larger percentage see opportunities for expansion and improvement in 2023.
Real estate organizations are facing similar challenges, with rising interest rates, declining gross domestic product, and supply chain disruption. But as in property management, many companies are looking past these challenges and looking for transformative action that can help them thrive beyond the current issues.
Accounts payable play a significant role in both easing the burdens faced by property management and real estate groups and paving the way for growth. Properly managed, it can help ensure consistent cash flow and make the job of financial forecasting easier. But to do so, AP teams need to eliminate manual accounts payable processes.
The Relationship Between Payables and Cash Flow
Accounts payable managers and employees face a delicate balance when it comes to making payments and optimizing cash flow. Pay too early, and that cash is no longer available to your company, and as such, has a negative impact on your cash flow. Pay too late, and you may incur penalties and fines that also hurt your cash flow. The trick is to find the sweet spot, not letting go of your money any earlier than necessary, while still meeting your obligations and deadlines.
Calculating your average payable period, or days payable outstanding (DPO) is one of the best indicators of success when it comes to managing the outflow of cash. In short, DPO is a ratio that measures how long it takes for a company to pay its short-term liabilities.
As a general rule, a higher DPO indicates that your company is getting the most out of every dollar and maximizing your trade credit. Of course, a high DPO can also indicate that a company is struggling to meet its financial obligations. DPO often requires context to help truly understand the number.
Automation aids the process in multiple ways. In the simplest terms, eliminating manual payments — such as paper checks — cuts down on the amount of time it takes a payment to clear. On average, a check clears in approximately two business days, though banks can hold them up to five. By comparison, using automation software allows a payment to be made instantly so that the payment is more quickly visible in your bank account, which aids in cash management.
An Accounts Payable automation software also centralizes your payables information and provides end-to-end oversight of the process. This transparency allows for a more strategic analysis of how and when to make payments. It can also help you keep track of vendor agreements that may provide discounts for early payment, making it advantageous to pay an invoice sooner, and those that make sense to pay later in the process.
In addition, customizable workflows offered by automation help ensure that the approval and payment process progresses smoothly so that there are no unnecessary delays that lead to late payments. Each of these factors allows the accounts payable department to play a direct role in the company’s cash flow, optimizing when and how money goes out.
In a small way, automation can also impact cash flow by becoming a minor source of revenue. As mentioned, many vendor agreements will provide benefits such as discounts for early payment. This essentially puts money back into the company’s bank account. Timely payments can also provide organizations with negotiating leverage when it comes to discussing terms and rates with vendors, helping them gain a more favorable position that saves money.
How Automation Aids Forecasting
Establishing a cash forecast requires four essential steps:
- Determine how far out you want to project.
- List all your incoming funds to find your net income.
- List all our outgoing expenses to find your net outgoings.
- Subtract your net outgoings from your net income.
The result will either be a positive or negative number. A positive number indicates that you have more money coming in than going out. A negative number suggests that you are spending more than you are making.
Keeping track of a running total on a weekly or monthly basis gives you an idea of your cash flow over time.
Manual accounts payable complicate the process. Without visibility over the AP process, companies cannot effectively monitor the total amount of payables they have due or upcoming. In addition, AP leaders cannot monitor the flow of an invoice from the time it is received until it is paid, meaning that they cannot identify bottlenecks that may be preventing timely payments.
Better Cash Flow = Greater Opportunity
For property management and real estate companies, AP automation provides better cash flow and better forecasting, which furthers their ability to invest in growth and expansion programs. Adopting an automation solution helps organizations plan beyond the industry’s current challenges and embrace the opportunities that will help them flourish now and into the future.
To learn more about how AP automation can improve the payables process for property management and real estate companies, watch our on-demand webinar, How AP automation Can Be Your Best Friend in Property Management & Real Estate.
