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.

Accounts Receivable Tips for Business Owners

As a small business owner, how many responsibilities are you juggling throughout the day? Some people find it hard to stay current with accounts receivable invoices when they are busy working on product development, marketing, employee management, and more. Even though you are working on many important details in your business, it is important that you are proactive with your AR strategy.

Why Your Accounts Receivable Strategy is Important

Do you find that your sales are strong, and yet you are always facing a difficult cash crunch? It can be a challenge to keep the money flowing if you don’t have a good AR system in place. Even if the numbers show that your business is prospering, you could be facing serious cash flow issues if you aren’t diligent with collecting payments from your customers.

It’s often easy to stay current with your account payable invoices, because the vendors expect payment by a certain date to avoid fees and interest costs. Do you maintain these same standards with accounts receivable? You need to be sure that money is in the bank so you can pay your bills, which means that you must be diligent about collecting the cash that is owed.

In fact, it’s easy to see that establishing an effective AR strategy should be a foundational practice for every small business. Unfortunately, too many small business owners neglect AR and face avoidable problems as a result. When you optimize your Accounts Receivable systems, you can reduce your stress and optimize the financial success of your company. As a result, healthy cash flow will have a positive impact on your sales, marketing, and all other business operations.

As you can see, it is essential to create a good AR system and also stay consistent with maintaining the system in the future. It’s worth the time to structure these processes within your company. Always look for opportunities to improve these systems if needed. Even if you don’t see the immediate benefits of optimizing your Accounts Receivable processes, these efforts will undoubtedly have a powerful effect on your future business efforts. You can reduce the possibilities of wasting existing capital, giving you the cash flow to pay down debt, fund growth, and reduce costs.

Common AR Problems Faced By Small Business Owners

There is no reason to “reinvent the wheel” when other business owners have already forged the pathway forward with good AR systems. Here are some of the common pitfalls encountered when business owners don’t have a good Accounts Receivable system:

  • Time: You might feel you don’t have time to work on AR right now. But, procrastinating this process can result in a huge time requirement in the future when you are trying to clean up the mess. It is best to be consistent and diligent with your billing in real-time. This process minimizes the work that you need to put in later on when the information is no longer fresh on your mind.
  • Cashflow: A lack of money in the bank will have a ripple effect to impact all aspects of your business. For example, if you aren’t collecting on the invoices that are due, then it means you won’t have the cash needed to invest in your marketing strategy. As a result, your business growth will slow.
  • Cash Allocation: Another issue with poor AR systems is that you will find it difficult to stay consistent with the allocation of your cash resources. When cash is tight, it means that you will always be putting out the fires instead of building your business proactively.

Tips for Improve AR Systems

Now that you can see the importance of a good AR system, it’s time to commit to the changes that will improve your business practices. What are the best tips that need to be implemented? Here are a few proven strategies that can help your business thrive:

  1. Invoice Timing: Don’t fall into the trap of procrastinating the timing of when the invoices are sent out. If your customers aren’t invoiced, then you can expect payments will not come through. Invoicing consistently means that you can receive the payments as soon as possible, helping to keep the cash coming into your bank account. The best practice is to send the invoice at the time of delivery, giving the customers an immediate reminder that the payment needs to be sent.
  2. Invoice Follow Up: Just because you send the initial invoice, doesn’t mean that the payment will be remitted automatically from your customers. Build in a follow-up system for invoices that are due. The process can be built into your accounting software with reminders that you need to reach out to customers who are past-due with their payments.
  3. Ask for Payment: You should never feel bad about following up on an overdue invoice. If you don’t ask for the payment, then it will result in invoices that are months old. The longer the invoice sits unpaid, the more likely you will never receive payment on the invoice. If your digital reminders aren’t enough to encourage the customer to send payment, then you shouldn’t hesitate to have a conversation with the person. This discussion can help you understand more about the payment delay, giving you the opportunity to find a solution that meets the needs of all parties. For example, if the payment is late because of the customer’s cash flow concerns, then you might be able to set up a payment schedule with smaller milestones.
  4. Clear Payment Terms: Make sure you are clear about payment expectations from the beginning. These terms will give your customers information about the expected timeline for the payments, helping you avoid confusion when it is time for the payment to be collected. Communicating this information gives you the structure so that you can build in late fees or interest costs as needed.
  5. Milestone Invoicing: If you are working on a big project with a client, it isn’t necessary to wait until the completion of the project to be paid. When larger projects cover a long period of time, it is best to bill based on milestones instead of completion. This milestone billing strategy ensures you have money for supplies and payroll as the project progresses, helping you avoid cash flow issues. Plus, you reduce the risk of missing out on the full amount if the customer doesn’t pay for some reason in the future.
  6. Itemizing Invoices: Don’t send a generic invoice with an unexplained amount due. Each invoice should show the breakdown of the products and services that were provided. If customers have questions or disagree with the amount, then it means that they will likely delay payment on the invoice. You can reduce the risk of this delay by showing the full amount due as well as the breakdown, helping to avoid questions about the money that is due.
  7. Provide Various Payment Options: While it’s true that “cash is king,” you will lose out on business if you don’t accept credit card payments. It is smart to accept a variety of payment options, including cash, direct deposit, credit cards, Paypal, and even checks. Giving customers several payment options increases the likelihood that they will be able to come up with a payment solution that fits their cash flow needs.

Start This Process Early

Regardless of the stage of business development you are experiencing, it is essential you are proactive with implementing a good AR system as soon as possible. Even if your business is in the start-up mode and you aren’t collecting money for products and services yet, you need to be sure that the system is in place when you are ready to move forward.

Too often, business owners are so focused on product development and marketing strategies that the important financial details get overlooked. Make the smart decision by starting this process early, so you have a good system in place when the time comes. Your AR system should include details such as the accepted forms of payment, establishing payment terms, and follow-up communication for unpaid invoices. When you are proactive with these details, it makes your business launch smooth and seamless.

Tapping into Industry Expert Knowledge

Are you running into challenges with your accounts receivable system? It can be hard to create a new system if you don’t have experience with financial tracking or accounting. Luckily, you can hire industry experts who will help you structure the right financial software to systematize your invoicing and payments. This process is invaluable to create the structure that is needed, so you don’t have to stress over your small business accounting.

You’ll find it is worth the investment to tap into the services offered by an experienced team. If you are interested in more information about how you can improve your accounts receivable and accounts payable systems, then our team is here to assist. Call Easier Accounting for information about the services that are available for your small business: (888) 620-0770.

How to Collect on Outstanding Invoices

Cash flow is a common problem that can make it difficult for small businesses to stay afloat. Do you have accounts receivable invoices that will be coming soon, but you don’t have enough cash to pay your current bills? If you are running into cash flow issues, then you need to enlist the help of an experienced small business accountant.

To keep up with overhead costs and ongoing expenses, you need to be sure that you are bringing in more money than what is being spent. The success of your company hinges on the positive cash flow, resulting in excess profits that can go to the owners and investors.

Primary Cause of Cash Flow Issues

What is the primary cause of your cash flow issues? Usually, these problems are based on the outstanding money that needs to be collected for accounts receivable. The truth is that this money can’t be considered income until you have the cash in your bank account. Even though you are anticipating payments that will be coming through soon, you can’t depend on that money until it has been received and the check clears.

Each time you put together an invoice, it is basically a short-term loan to that customer. You are trusting the customer to pay the money as agreed, but people don’t always follow through to pay as planned. Sometimes, the customer is dealing with their own cash flow problems, causing a domino-effect on their own overdue bills.

Unfortunately, it is common for business owners to be waiting on payments from customers. To make problems worse, small businesses don’t always have a good system in place to follow-up regarding collections. If you want to ensure the long-term success of your business, then you need to make sure that you are proactive to collect on any past-due balances that are owed by your customers.

Why Does Cash Flow Matter?

If the money will be paid eventually, why does it matter for you to receive timely payments? Without the cash to keep up with current expenses, your business will go under. You need cash on hand to cover costs such as:

  • Payroll
  • Rent or mortgage on the building
  • Utilities
  • Restocking inventory
  • The option to take advantage of expansion opportunities
  • Purchasing office supplies
  • Meeting debt payments
  • Reinvesting in business development
  • Be prepared for financial emergencies

For example, if the cash isn’t available to cut checks for employees on payday, then it is likely that you will lose your staff. These people will be angry and walk away from the company, resulting in a situation where you no longer have a team to service the needs of your customers.

It is a vicious cycle: cash flow problems can cause you to lose employees. At the same time, losing employees can contribute to cash flow issues because you will lose business. So, you need to take a preventive approach to ensure that you have the money that is needed to keep up with the operating costs of owning a business.

The Size of Your Company Impacts the Size of the Outstanding Accounts

Every company has outstanding invoices that need to be paid by the customers. As a company gets bigger, it is expected that these accounts receivable numbers will grow as well.

You need to learn how to manage you accounts receivables to ensure that your customers send payments in a timely manner. Keeping up with the growth will give you the opportunity to continue growing.

You don’t necessarily need to do all of these tasks on your own. In the beginning, it is common for a small business owner to oversee most of the financial details, including bookkeeping and collections. But, eventually, you will need to hand these tasks over to a professional team so that you can focus on other aspects of running a business that need to be addressed.

How to Collect on Past-Due Invoices

Now that you can see the importance of staying current with collections, you are probably wondering how you can implement this strategy into your business. It is one thing to understand that you need to be collecting on the invoices, and it is a whole different situation to make changes to follow through on these principles.

These are a few strategies that you can use to collect the money that is owed by your customers:

  • Ask Questions to Understand the Situation: Without an understanding of the customer’s current situation, it might be hard for you to find a win-win situation. Most customers have the desire to pay the bill, but they are running into issues with disorganization or cash flow problems. So, you should start the conversation by asking why the invoice hasn’t been paid. Sometimes, it is as simple as the invoice being overlooked on a messy desk, and they will send the money right away. Other times, they might need a little more flexibility in the payment terms. So, you can have an open discussion to understand their needs, and then put together payment terms that will work for everyone involved.
  • Put Together a Collection Policy: One of the reasons that you aren’t receiving the money that is due is because you don’t have a solid collection policy in place. Take time to design a plan that will work for your business, then make sure that you are consistent in following through in the enforcement of that plan. Include details about fees and interest costs that will be accrued for the past-due balances, and provide a copy of these details to every customer. The best solution is to inform customers about the collection policy in advance so that you can prevent missed payments in the future.
  • Send Reminders: In the beginning, you shouldn’t jump to conclusions that the customer isn’t going to pay the invoice. Instead, send a gentle reminder with a copy of the invoice so that they can remember the money that is due. This reminder could be in the form of an email or a letter in the mail. Try using different communication channels if you don’t hear back.
  • Follow Up with a Phone Call: If you are sending invoices in the mail or via email, it is possible that the paperwork is overlooked in a busy office. Send the reminder, then consider the advantages of following up with a conversation. A quick phone call can go a long way to clear up any misunderstandings regarding the payment of the invoice.
  • Provide Other Payment Options: Is the customer skipping a payment because they don’t have the cash available to write a check? Offer another option that can be used to pay the bill. For example, you might consider a credit card payment option if that works better for the customer. Business owners often prefer to avoid credit card payments because of the payment processing fees that are incurred. But, these fees are much better than not receiving the payment at all.
  • Setup a Plan for Installment Payments: Another way you can work with the customer is by finding a payment schedule that will match their abilities. For example, instead of demanding the full payment right now, you could offer installment payments to be sent over the period of a few months.
  • Send a Certified Letter: A certified letter probably isn’t worth the cost if you are trying to collect a small balance. But, if you have a customer with a large outstanding invoice, then it might be worth the effort to send a certified letter requesting payment. Talk to your lawyer to get an official letter threatening legal action if the money is not provided by a certain day.
  • Hire a Collection Agency: In the worst situations, you might consider hiring a collection agency to follow up. If you choose this option, expect that you will pay a high percentage of the payment to the agency. Typically, you will only need to pay if the money is collected. Even if you can only recover a partial payment and a portion of that goes to the agency, you are still in a better financial situation compared to not receiving the money at all.

There isn’t one strategy that works for every business, so it is best to consider the needs of your company. You can use one or more of the strategies listed above to find the best solution to stay ahead of your accounts receivable issues.

Hire an Accountant to Help

As a business owner, there are many responsibilities that you need to juggle each day. It can be overwhelming to keep up with everything, especially if you are facing stressful cash flow problems. Instead of feeling bogged down by the responsibility, you should consider the benefits of hiring the experts to provide the personalized support that you need.

Here at Easier Accounting, we understand the ins-and-outs of financial management for small businesses. Our services are designed to make it easy for you to keep up with the responsibilities of growing your business. If you have questions about cash flow, accounts receivable, or any other financial issue, we invite you to contact our team to learn more about the ways that we can help: (888) 620-0770