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How can a business decrease its days payable outstanding without jeopardising supplier relationships?

A business can decrease its days payable outstanding by improving cash flow management, negotiating better terms with suppliers, and automating payments.

Improving cash flow management is a crucial step in reducing days payable outstanding. This involves ensuring that the business has enough cash on hand to meet its obligations as they fall due. It may involve adjusting the timing of cash inflows and outflows, for example by speeding up the collection of receivables or delaying the payment of non-urgent expenses. This can be achieved through effective credit control procedures, such as offering discounts for early payment, imposing penalties for late payment, and regularly reviewing customer credit limits.

Negotiating better terms with suppliers is another effective strategy. This could involve seeking longer payment terms, which would give the business more time to pay without increasing its days payable outstanding. Alternatively, the business could negotiate discounts for early payment, which would provide a financial incentive to pay sooner. It's important to approach these negotiations with care, as pushing too hard could strain the supplier relationship. The business should aim for a win-win outcome, where both parties benefit from the new terms.

Automating payments can also help to reduce days payable outstanding. This involves setting up automatic payments to suppliers, which can ensure that payments are made on time and reduce the risk of late payment penalties. Automation can also reduce the administrative burden of managing payables, freeing up time and resources for other tasks. However, it's important to monitor these payments closely to avoid errors or fraud.

In addition to these strategies, the business could consider other options such as factoring or supply chain financing. Factoring involves selling receivables to a third party at a discount, which can provide immediate cash to pay suppliers. Supply chain financing involves a third party providing short-term credit to the business, which can be used to pay suppliers while the business waits for its own receivables to be paid. Both of these options can help to improve cash flow and reduce days payable outstanding, but they also involve costs and risks that need to be carefully considered.

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