EA - Accounts Payable - Best Practices for Small Businesses

Accounts Payable: Best Practices for Small Businesses

Two essential aspects need to be addressed for maintaining your books: the money coming in (Accounts Receivable) and the money that is going out (Accounts Payable). Most small business owners are familiar with these two phrases, and they understand the general concept. But it can be a challenge to know how to implement the right bookkeeping system to track these numbers.

Whether you are looking to rework your bookkeeping and accounting system, or you need to start from scratch for your new company, it can be valuable to tap into advice from an experienced outsourced accounting team.

Accounts Payable: What Does it Mean?

Sometimes, products and services are paid on the spot. For example, if you go to an office supply store to purchase items that are needed for the office, then you will likely pull out a credit card or cash and pay for the items immediately.

There are times when businesses share relationships that allow products and services to be provided on credit, then the vendor will send you an invoice for the amount due. These outstanding balances fall into the category of “Accounts Payable” (AP). If you add up the AP balances for your business, then it is the total amount currently owed to suppliers and vendors.

AP invoices can be small with local vendors. Or you might have outstanding credit card bills that you are paying for each month. Regardless of the type of debt, you need to be sure that you consider the amount due so that you can work these details into your budget. It is essential to ensure that you are planning ahead, so you’re prepared with sufficient cash flow in the future.

Accounts Payable vs. Accounts Receivable

If you are on the receiving end of the money that is due, then it is marked down as “Accounts Receivable” (AR) in your books. For example, you might be anticipating payments for products or services that have been provided. The AR value in your accounting system shows the total due from your customers.

Tracking both AP and AR is essential because these numbers affect your current cash flow and what you can expect in the future. The most stress-free way to run a business is to stay current with both AR and AP, to ensure that the money is flowing in from your customers so you have the cash available to pay your bills.

Managing your accounting and bookkeeping system might be one of the most important things you can do as a small business owner. Your cash flow management is based on your tracking system and cash availability. If you aren’t keeping up, then you will likely miss vendor payments, which means that your product and service providers could lose patience… which will eventually have an impact on your business success.

Accounts Payable Tip #1: Automate as Much as Possible

It takes valuable time to manually calculate the invoices that need to be paid. Additionally, a manual system can be quite burdensome when it comes to tracking the payments that have or haven’t been finished. Whenever manual calculations are occurring, there are points where human error could interfere with the accuracy of your numbers.

You don’t need to spend your limited time crunching the numbers. Instead, invest in a good accounting system that will automate this process wherever possible. Accounting software has come a long way in recent years, making it easier than ever to keep your books current and accurate.

Accounts Payable Tip #2: Go Paperless

Yes, going paperless can help you save the trees. But this recommendation isn’t about rainforest protection. Going paperless is a way to save both time and money by streamlining your system. If you want to have a truly automated accounting and bookkeeping system, then you need to eliminate the stacks of paperwork that can pile up on the desk.

Not only is a paperless system more convenient, but it reduces the workload that needs to be managed in your office. Eliminating paperwork means that you don’t have to have big filing cabinets, paperwork tracking systems, and office space to manage these documents.

Plus, a paperless accounting system enables you to leverage the services of an outsourced accounting team more effectively. Your accountant will be able to see your numbers remotely, which means there is no need for in-person meetings that cut into your schedule. At the same time, you have the freedom to access your business numbers from any location: in the office, at home, or even on vacation if needed.

Accounts Payable Tip #3: Checking for Errors

Even if you automate your bookkeeping and accounting system, there is always a risk of errors along the way. Small bookkeeping errors might seem insignificant, but they can have a big impact on your financial reports. When you are making financial decisions, you need to be sure that the numbers are an accurate reflection of what is currently in your bank account, and the AR payments that will be expected soon.

Building in safeguards to catch errors not only helps you detect mistakes, but it also shows the red flags if fraud is occurring. The best way to build trust and minimize the risk of losing money internally is to have checks and balances in place. Don’t assume that the accounting software is always accurate. You need to have a third-party who can run internal audits to ensure that everything is adding up.

Additionally, regular account reconciliations are essential to staying ahead of these small errors. This step is one that is often avoided by small business owners because they find it burdensome and boring. You don’t have to crunch the numbers on your own. Instead, let an experienced outsourced accounting team oversee this process.

Accounts Payable Tip #4: Watch Invoice Due Dates

Maintaining good relationships with your providers is critical to ensuring that those products and services will continue to be available when you need them in the future. If you miss payment deadlines, then that vendor will likely be hesitant to work with you again.

So, it is important to watch the due dates and prioritize payments based on the calendar. Not only does avoiding late payments help you maintain good business relationships, but you can also avoid extra costs that are often added on for late fees and interest charges.

Accounts Payable Tip #5: Maintain Open Communication with Vendors

Things happen in business, which means that you might be facing cashflow issues that prevent you from timely payments. If you are dealing with cash flow issues, then it is smart to stay in contact with your vendors. Talk to them about a payment schedule. Be sure to prioritize payments to vendors who are essential for revenue generation within your company. For example, you might be able to live without professional office cleaning services, but you won’t be able to keep the company going without restocking the inventory.

Accounts Payable Tip #6: Negotiate the Terms

When you’ve established a good relationship with the right vendor, you might have the chance to adjust the payment terms if needed. You will have more opportunity to negotiate when you’ve already built trust with the provider.

Everyone makes money when you can maintain a good relationship. So, it’s in the interest of all parties involved to make sure that it is a win-win situation. You might find an opportunity to negotiate better terms for the products or services that are needed. For example, talk to your main vendors to see if they offer discounts for early payments.

Accounts Payable Tip #7: Stay on Top of Outstanding Invoices

It’s easy to let unpaid invoices slide for a while, especially when you are busy working on other responsibilities within the business. But even the smallest invoices can add up, resulting in a lot of unpaid money that is owed to your providers.

You need to be sure that you have an effective system in place to follow up on the Accounts Payable invoices that are due. Not only do you need to send these payments on time, but make sure that your vendors received the payment. For example, if a provider sits on a check for a few months, then it could cause problems with your cash flow when the check is cashed unexpectedly in the future.

You need to have an accounting system that shows which payments are still pending. Don’t hesitate to reach out to a vendor if a check hasn’t been deposited yet. Sometimes payments get lost in the mail or end up at the bottom of a stack of paperwork. You can avoid these issues by having a follow-up process in place to reach out to vendors when needed.

Accounts Payable Tip #8: Choose a Reputable Small Business Accountant

One of the best investments you can make for your small business is to hire an experienced outsourced accounting team to assist with your financial details. If you are looking for support with Accounts Payable and Accounts Receivable, then Easier Accounting is here to help. Call any time to learn about the services that will be a good fit for your business needs: (888) 620-0770.

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