As a small business owner, few things are more important than keeping proper books. You’ve heard the term “accounts payable” thrown about ad nauseam: this article will explore what AP means for your business and offer some ‘best practices’ to help you along.
If you’re considering reworking your approach to accounts payable, Founder’s CPA Group can help. Founder’s CPA is a full-service accounting firm that specializes in small businesses and startups.
What Does The Term “Accounts Payable Mean”?
If you’re like most small business owners, you probably don’t pay for most things upfront. For example, consider items like supplies from vendors or services from contractors. Chances are that your vendor will send an invoice with a due date for payment. These liabilities are a form of short-term debt that you should pay soon.
“Accounts payable” (AP) refers to the total amount of money you owe to these external vendors and suppliers. Think of AP as an “I owe you” from your business to another business.
How Is Accounts Payable Recorded?
Recording accounts payable can be a bit tricky for non-accountants. On one hand, AP is a collection of your short-term debt obligations. However, consider what’s really going on: your business is purchasing goods on credit. The external supplier is extending to you their services based on the promise of repayment: the actual cash comes later!
With that in mind, accounts payable are a source of cash (think of AP as credit/funds that are being borrowed from a supplier). Your accountant will credit the accounts payable account when they receive the invoice from the supplier. Your accountant will then debit the accounts payable when they pay the invoice.
What About Accounts Receivable?
If accounts payable is a collection of the amount of money your business owes to suppliers, accounts receivable would be the opposite. In a nutshell, accounts receivable is the money owed to your business.
Why Is Accounts Payable So Important?
Managing accounts payable is one of the most vital aspects of running a business. Few things are more important to a company than paying its bills (and accounts payable does exactly that). If your accounts payable management is lacking, vendors lose patience, reputations suffer, and your entire cash flow management goes out the window.
10 Best Practices for Accounts Payable
#1 Automate, Automate, and Automate Some More
Manually processing regular vendor invoices is not particularly ideal. Consider the workflow of a typical invoice:
- Your business receives the invoice (either via paper or electronically) and sends it to the proper department
- Next, the AP department manually processes the invoice into your accounting system
- The invoice is then approved or rejected, depending on the goods/services provided
- The AP department approves and submits the payment for processing
At every step of this workflow, there is the potential for human error. Unfortunately, mistakes in accounts payable results in unhappy vendors, increased expenses, and more headaches than you need. The first (and best) practice for improving accounts payable is to automate the process as much as possible.
Of course, delving into the world of accounting software and automated payment processing is not a simple task. If you’re debating which accounting software to use, consider scheduling a free consultation with Founder’s CPA Group.
#2 Order Invoices By Due Date
It can be a good idea to prioritize invoices by their due date. You’ll want to avoid late payments if it’s at all possible — no one likes hearing their paycheck isn’t coming — and keeping healthy relations with vendors is largely contingent on prompt payment.
Of course, small businesses and startups are not immune to difficulties in cash flow management. If it looks like you may need to delay payments to one or more vendors, prioritize your debts. Determine which vendors are absolutely for generating revenue and work backward from there.
#3 Talk With Your Vendors
Many vendors are willing to negotiate better terms with businesses with whom they have a good relationship. In the end, the interaction between a company and a vendor is a mutually beneficial relationship — both parties profit — and it’s in everyone’s best interest to keep that relationship going.
It’s not uncommon for suppliers to offer early payment discounts, for example. Take the time to explore your business relationships and see if there’s any room for improvement.
#4 Have Multiple Checks and Balances and Separation of Duties
Human error is a recurring theme in accounts payable and for good reason: people are fallible. Having multiple people involved in the process reduces the likelihood that an error will go unnoticed.
Unfortunately, fraud is an ever-present concern. The more you separate duties, the more you reduce the chances of fraud occurring. This is not a topic that small business owners typically like to talk about, but it’s an important one nonetheless. Whenever possible, require multiple checks and balances to ensure everything is on the level.
#5 Regular Statement Reconciliation
As a general rule of thumb, it’s a good idea to reconcile your accounts payable ledger regularly (monthly or even more frequently, depending on how your vendors). Small business owners tend to avoid regular AP reconciliations for a simple reason: it’s not very exciting.
That said, reconciling your accounts payable ledger is much easier if done regularly. A good suite of accounting software may even automate this process for. Feel free to schedule a free consultation with Founder’s CPA Group if you’re unsure about how to start this process.
#6 Centralize AP Processing and Reporting
A centralized accounts payable service center is a fantastic way to increase the efficiency and efficacy of your accounts payable staff. Think of this as a way to improve your AP workflow: a set of common practices and a shared reporting network is invaluable.
#7 Go Paperless (Seriously)
Going paperless is a bit of a cliche, but it’s one that rings truer than ever before. Paperless processing enables you to send and receive invoices, accept new orders, approve/reject invoices, and process payments all electronically.
Going paperless is linked to automation. The goal here to reduce the chances of human error and optimize your overall AP workflow. The more you avoid paper, the more efficient your AP practices become.
#8 Follow-up on Invoices and Checks
With more than $800 billion in unpaid invoices nationwide, small businesses are aware of the problem presented by cash flow management. Unpaid (late or not) invoices are a serious issue for businesses that rarely have sufficient cash reserves to operate for long.
When it comes to accounts payable, you’ll want to double down on checking on uncashed checks. Few things are more frustrating than a vendor who cashes checks randomly or weeks after receiving payment.
Do not shy away from reaching out to vendors and double-checking that they received payment. Checks get lost in the mail, payments get sent back, and a host of other problems may crop up.
Decide on a process for uncashed checks and stick to it religiously. If you run into a recurring problem with a specific vendor, reach out to them. It’s always a good idea to make sure your cash is exactly where it’s supposed to be.
#9 Improve Your Invoicing Process
Cash and liquidity management is the one area where improvements in accounts payable shine. Consider improving your invoicing process with some of the following tips:
- Pay invoices when they are due, not before. You need your cash now more than your supplier needs it early.
- Don’t be afraid to reject old or inaccurate invoices. Inaccurate invoices make future reconciliations frustrating and complicated.
- Develop a system where suppliers are able to submit their invoices electronically. Not only does this reduce the chance of manual error, but it will increase your ability to validate and process invoices quickly.
#10 Select a Payment Method That Saves You Money
The payment method you choose is quite significant. This is an often-overlooked aspect of accounts payable: minimize your payment expenses whenever possible.
Most payment methods have their own advantages and disadvantages. Paper checks, while of minimal expense, need to find their way to the vendor’s mailing address. EFTs or credit card payments may incur additional penalties or fees, depending on your banking institution.
As a general rule, find the payment method that works best for you and stick with it.
It’s Not Easy
Accounting is best left to the accountants. As a small business owner, your time is better spent doing what you do best: building your company. If you’re looking for a last ‘best practice’ for accounts payable, it’s this: schedule a free consultation with Founder’s CPA and let the professionals help.
The experts at Founder’s CPA Group can provide everything from software recommendations to outsourced accounting solutions. Contact our experienced team today!