A Guide for Streamlining Your Accounts Payable Process
In business, managing finances effectively is crucial for success, and a vital part of this is handling accounts payable (AP) efficiently. Accounts payable refers to the money owed to its suppliers and vendors for goods and services received on credit. Streamlining this process ensures timely payments, maintains good vendor relationships, and keeps your financial records accurate and up-to-date.
In this blog post, we’ll break down the accounts payable process, highlight its importance, and offer tips for making it as smooth and error-free as possible. Whether you’re a small business owner or part of a large finance team, understanding and optimising your AP process is essential for maintaining a healthy cash flow and avoiding costly mistakes.
My first job was in the AP department of a University; this meant that there were thousands of vendor invoices each year to process and pay. Having robust accounts payable procedures was essential to ensure invoices were paid promptly.
What is Accounts Payable?
Accounts payable is the money a company owes for goods or services received on credit. Accounts payable is a current liability on the balance sheet.
For small businesses, accounts payable can be a significant source of short-term financing because they do not have to pay for purchases when they occur.
All businesses will have to set up an AP process, but the process may vary slightly depending on the size and structure of the company. In this article, we will look further at the different options for an accounts payable process.
Accounts Payable vs Accounts Receivable
While both essential in accounting, accounts payable and accounts receivable are two sides of the same coin. Accounts payable (AP) tracks what a company owes to its suppliers or vendors for goods and services received. It’s essentially a running tab of outstanding bills.
On the flip side, accounts receivable (AR) tracks what customers owe the company for goods or services they’ve purchased on credit. In short, AP focuses on money flowing out of the business, while AR focuses on money coming in. Both play a crucial role in maintaining a healthy cash flow and understanding a company’s financial health.
If a company has a large account receivable balance, it should have plenty of cash coming in soon. On the other hand, if a company has large accounts payable, it will need to find some money soon to pay its bills.
How to set up an accounts payable system for your small business
Setting up an accounts payable system for your small business is vital in maintaining accurate financial records. The accounts payable department is responsible for managing all invoices and payments, so it’s essential to have an efficient and effective system in place. There are a few critical components to any accounts payable system, including accounting software and a process for coding and approving invoices.
Choosing the right accounting software is one of the most important aspects of setting up an accounts payable system. This software will track all invoices and payments, so choosing a user-friendly program that meets your business’s specific needs is essential. There are various accounting software programs on the market, so it’s important to research to find the one that best suits your needs.
Once you have selected the right accounting software, you’ll need to establish a process for coding and approving invoices. This process should be designed to ensure that all invoices are coded correctly and approved on time. By having an efficient accounts payable system in place, you’ll be able to keep accurate financial records and avoid any potential issues down the road.
The benefits of using an accounts payable system for your small business
For small businesses, accounts payable systems offer several advantages.
Perhaps most importantly, they can help improve cash flow by clearly showing what bills are owed and when they are due. It can significantly help avoid late payments, which can incur costly penalties.
In addition, accounts payable systems can help to streamline the payment process, making it easier and faster to get invoices paid. It can save time for other tasks, such as growing the business or providing better customer service.
Finally, an accounts payable system can help establish better supplier relationships. By paying invoices on time and in full, businesses can build trust and goodwill that may lead to favourable terms in the future. For all these reasons, using an accounts payable system is a smart choice for any small business.
Tips for streamlining the accounts payable process for your small business
Streamlining your accounts payable process can save your small business time and money. You can reduce the number of accounting errors and late payments by automating invoicing and payments. By consolidating vendors, you can negotiate better terms and payment schedules. Here are some tips for streamlining your accounts payable process:
1. Automation
One of the best ways to streamline your accounts payable process is to automate as much of it as possible. Several software programs can help you with this, such as FreshBooks, Xero or QuickBooks. Automating your accounts payable process can help you save time by reducing the need for manual data entry and eliminating errors.
Accounting software will produce the reports needed for the accounts payable account, giving a breakdown of when and how much is due or overdue.
2. Electronic Payments
Switching to electronic payments will streamline your accounts payable process. Rather than issuing paper cheques, you can make payments electronically through your bank’s online bill pay service or a service like PayPal. It will save you time and money on postage.
3. Early Payment Discounts
Another way to save money on your accounts payable process is to take advantage of early payment discounts. Many suppliers offer discounts for early payment, so if you can pay your invoices within the discount period, you can save some money.
4. Reduce Paper Usage
By reducing paper usage, you can save time and money on your accounts payable process. If possible, switch to electronic invoicing and only print invoices when necessary. You can also scan and save copies of vendor invoices rather than filing them in a physical file cabinet. Most modern accounting software packages allow emailing invoices or using automated software like Dext.
5. Set Up a Separate Bank Account
If you’re not already doing so, set up a separate bank account for your business expenses. A separate bank account will help you keep track of your business spending and make it easier to reconcile your accounts at the end of the month.
6. Hire an Accounts Payable Specialist or Bookkeeper
If you don’t have the time or resources to manage your accounts payable process effectively, consider hiring a specialist or bookkeeper. This person can handle all aspects of your accounts payable process, freeing up your time to focus on other aspects of running your business.
7. Check Supplier Statements
Part of the job of an accounts payable department is to check supplier statements of accounts. Checking the statement against the ledger accounts will ensure that all the invoices are received and that you pay the correct amount.
9 Steps to the Accounts Payable Process
Below is an image of the accounts payable cycle; we will look at each stage in detail.
A good Accounts payable system is a crucial but often overlooked part of running a business. The AP cycle is the process companies use to pay their invoices and manage vendor relationships. Understanding and optimising each step of the AP cycle can save your business time and money.
Let’s look at each step of the accounts payable workflow and how you can streamline it.
1. Decide on Goods or Services Required
The first step in the AP cycle is deciding what goods or services your business needs. This step is crucial because it sets the stage for the rest of the cycle. Take some time to consider what you need and why you need it before moving on to the next step.
2. Find a Supplier
Once you know what you need, it’s time to find a supplier who can provide it. This step involves researching your options and finding the best possible supplier. Be sure to compare prices, quality, and customer service before deciding.
3. Issue a Purchase Order to a Supplier
Once you’ve found a supplier, you can issue a purchase order (PO). A PO is a legal document that outlines the terms of your agreement with the supplier. Include all relevant details in your PO, such as price, quantity, delivery date, etc.
A purchase order might also be an email confirming the details of the required items.
4. Receive Goods or Services
After issuing a PO, you must wait for the supplier to deliver the goods or services. This step can be frustrating if there are delays but try to be patient and work with the supplier to ensure that everything arrives on time and in good condition.
5. Check Goods or Services
Checking the goods or services you receive from the supplier is an important quality control measure. This step helps ensure that you’re getting what you paid for and that there are no defects or issues with the products or services.
6. Receive Vendor Invoice
Once you’ve received and checked the goods or services, you’ll get an invoice from the supplier detailing what was delivered and how much it cost.
7. Enter Vendor Invoice on Accounts Payable
Enter the invoice into your accounts payable system. This step ensures that everything is properly tracked and recorded for accounting purposes. It is vital to code invoices to the correct nominal code; this ensures that the financial reports are accurate.
8. Check Invoice Against Purchase Order and Approval Process
For a more significant business, the approval process is essential. It ensures that the right people have seen and agreed with the purchase. If you are using accounting software, the vendor’s invoice is approved within the software.
If everything looks good, go ahead and authorise payment
9 Pay Invoices
Finally, it’s time to process payment for invoices! Be sure to stay on top of vendor payments to avoid late fees or damage to your relationship with your supplier.
Common mistakes made in the accounts payable and how to avoid them
AP departments are under constant pressure to meet deadlines and avoid errors. With such a high volume of invoices and payments to process, it’s not surprising that mistakes are occasionally made. However, some common errors can be easily avoided with little care and attention.
One mistake often made is paying an invoice twice or the wrong amount. This can happen if an invoice is processed manually and entered into the system again. To avoid this, always check the system before making a payment to ensure an invoice has not already been paid.
Late payment can damage your relationships with suppliers and result in late fees. To avoid this, set up a system to remind you when invoices are due and ensure that payments are processed promptly.
Finally, another mistake is sometimes failing to reconcile vendor statements with the accounting system. Not reconciling the account can lead to errors in your records and may cause you to overpay or underpay a vendor. To avoid this, reconcile vendor statements regularly and update your records accordingly.
By being aware of these common mistakes, you can take steps to avoid them and keep your AP process running smoothly.
Accounts Payable and the Cash Flow Statement
One of the financial reports a business produces is a cash flow statement. It records all the expected income and expenses in a given period. An up-to-date AP statement helps ensure that the forecast is accurate and that all the necessary information is included.
Below is our free cash flow template.
A cash flow forecast is essential for businesses to ensure they have enough money to run the business and invest in future growth. The AP department plays a vital role in the cash forecasting process. This is because the timing of payments can significantly impact the amount of money available to the business.
The AP Process Conclusion
The AP process may seem daunting initially, but it’s pretty simple once you get the hang of it. Remember to stay on top of your invoices, review them carefully before approving them for payment, and make payments promptly to avoid late fees or damage to your credit score. Do all of this, and you’ll quickly keep up with your company’s finances!
