What is Accounts Payable and Why is it Important?
Accounts Payable (also referred to as A/P) refers to all bills and expenses owed by a company that are due in the near future. In fact, the only expense of a business that is not considered to be accounts payable is payroll. This makes Accounts Payable a critical aspect of a business, and a main component of Cash Flow Management.
Tracking Accounts Payable
Keeping track of Accounts Payable is critical to understanding how much cash is needed to keep the business up and running in the near future. The best way to track Accounts Payable is by implementing a dependable Accounts Payable Process. An Accounts Payable Process will help you plan for both the short term and long term, in terms of cash flow. The efficiency and effectiveness of the process will also affect your company’s cash position, credit rating, and, ultimately, your relationship with your vendors.
An Accounts Payable Process
Managing Accounts Payable should be a weekly task. This allows you to take advantage of term discounts and to manage cash flow more effectively by paying vendor bills at the last possible minute. Here is an example of a good Accounts Payable Process:
- Throughout the week, bills and invoices are neatly collected by one individual.
- On Monday morning, bills and invoices are received and entered into your accounting system (you can enter bills daily depending on the number of bills your company receives). TIP: Be sure to enter each invoice individually, even if you receive multiple invoices from the same vendor. This helps to track down invoices within your accounting system later if any questions are raised.
- The following information should be entered from the invoice you received:
- Vendor Name
- Account Number
- Date of the Invoice
- Invoice Number
- Terms of the Invoice
- Due Date of the Invoice
- Discount Due Date of the Invoice
- Amount Due
- The following information should be entered from the invoice you received:
- On Monday Morning, once all invoices and bills are accurately entered into your accounting system, an A/P Aging Report and/or an Unpaid Bills Report should be generated.
- These reports will show you what bills are due on what day. This allows you to make an educated decision on which bills to pay and which ones you can hold off on paying until they are closer to their due dates. You will also be able to clearly see which bills should be paid soon in order to take advantage of term discounts.
- On Monday, provide the A/P report(s) generated above to an appropriate person for approval to be paid.
- The appropriate person will then mark off which bills are to be paid this week.
- If your vendor’s terms are 30 days, don’t wait until the 30th day to pay their bills. Make their payment early in order to allow for them to receive your payment a few days in advance of their deadline. This will help you maintain good relations with your vendors, increase your company’s credit score, and take away possible future headaches of arguing about late payment fees.
- Checks can then be cut and the payments mailed out.
By following a simple but efficient Accounts Payable Process, such as the one above, you can effectively manage how much cash is leaving your company. When combined with a dependable Accounts Receivable Process (incoming cash) your Accounts Payable Process will help you maintain the maximum amount of cash possible in your bank account. Both of these processes are just parts of Cash Flow Management.