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Remember how those entrepreneurs on TV often quip that “it takes money to make money?” Well, they’re right—at least in part. No matter what kind of business you’re in, you’re likely paying someone for something in order to keep your business running.
Put together, all those costs and expenses—most specifically the ones purchased on credit—create a line item on your balance sheet known as “accounts payable.”
Let’s be real. Accounts payable isn’t even your nerdy accountant friends’ favorite subject. It’s tedious, it’s time-consuming, and it costs you money.
But proper management of your company’s payables is critical to the long term vitality of your business. It impacts both your relationships with your vendors and your cash flow, which spell the difference between profit and loss, between future success and business failure.
Fasten your seat belts, friends. We’re going to dive into everything you need to know to create an accounts payable system that will help your business thrive for years to come.
Accounts payable describes all of the money a business owes to vendors and suppliers for purchases of goods and services made on credit. Any individual or company that provides supplies, equipment, or services required for the operation of your company is considered a vendor. For example, a retail jewelry shop’s vendors may include wholesale jewelers, while a printing shop may count their ink supplier among their most crucial suppliers. The total sum owed from these bills are listed together on the balance sheet as a “current liability.”
Together, accounts payable and accounts receivable are the two greatest factors determining a business’s cash flow.
It’s important to track accounts payable in a timely manner to ensure that you know how much you owe each supplier and that you make payments on time, every time. Failure to properly manage accounts payable can lead to late payment penalties, damaged supplier relationships, and even business failure that could have been avoided if oncoming cash flow issues had been foreseen and properly managed.
When you look at your balance sheet, accounts payable may look like a single line item that you wouldn’t give much, if any, thought. But in reality, accounts payable is made up of many bits and pieces required to make your business run.
If you’re a solo entrepreneur in a service-based business, you may have very few bills coming in from outside sources. Product-based businesses, however, rely heavily on the vendors in their supply chain to keep their business up and running. Regardless of your business type, every business owner will eventually owe someone money for some business-related purpose.
Especially for rookie entrepreneurs with little to no business background, setting up your accounts payable for the first time can be extremely intimidating. But the process itself is fairly straightforward and doesn’t have to be difficult.
If you’ve been managing your personal bills for awhile—including utilities, student loans, mortgage or rent payments and the like—you’ve likely already used a very similar system, whether formally in a spreadsheet, on a post-it note, or just in your own head. The point of your accounts payable system is just to keep track of when payments are due and make sure that you don’t let any bills get lost in the shuffle.
The most basic way to manage your company’s accounts payable is in a basic spreadsheet format, such as with Microsoft Excel, Numbers for Mac, or Google Sheets. Using a spreadsheet system is a great way to learn how accounts payable works, and may even be a sufficient long term solution for very small businesses who work with just a few vendors.
For the purposes of understanding the accounts payable process, let’s walk through setting up your accounts payable using a basic spreadsheet tool.
Once you’ve gathered your currently open invoices, you’ll need to find some basic relevant information to track on your spreadsheet, including:
Vendor/Biller’s Name: Who are you paying?
Account Number: Your vendor will ask for this if you ever need to call about a bill.
Invoice Number: So you can find it easily later on.
Expense Type: What did you use their service or product for?
Date Invoice Was Received: When you had it in hand, NOT the date on the invoice.
Payment Deadline: When is it due?
Status: Ex. awaiting approval/paid/past due
Input this information into your spreadsheet for each of your unpaid invoices. If you’ve been in business for awhile and haven’t been tracking your accounts payable, you may want to repeat this process for your last 60-90 days of paid invoices, just so that you have all of your information in line and can compare current and past invoices.
This initial set-up process will be heavy on data entry—but don’t be discouraged. Once the setup is complete, your day-to-day payables process will likely be far less time intensive.
Once your initial system is set up, enter every incoming bill into your digital file the moment you receive it. Keeping track of your digital invoices will be pretty easy, but you’ll also need a system to keep your paper bills organized.
Plan to open paper bills immediately, enter the data into your spreadsheet, then file the hard copy until it is paid. After you’ve sent payment, you’ll want to keep a hard copy of the bill stub for your records. If you have an even split of paper and digital invoices, it may be beneficial to scan paper invoices in order to keep all files in one place.
Managing your accounts payable is ultimately a matter of choosing a system that works for you, but the most important thing is that you choose one system and stick to it. Even if you’ll be the only one with hands on your payables process, create a written procedure to follow.
When will you open and input invoices? Will you make daily payments as needed, or cut checks once a week? How far before the due date will you issue payments? Which of your primary vendors offer online payments, and will you be using this payment method?
Of course you can fine tune these procedures as needed down the line—but the more clearly you outline how you’ll handle your accounts payable from the outset, the less likely you are to sidestep your system, which can lead to missed payments and lost invoices.
After you’ve been tracking your payables for some time, you’ll start to notice some recurring trends in your payment scheduling. What time of the month involves the most spending for your business? Which payables categories tend to fluctuate the most?
The longer you’re in business, the better you’ll be able to predict monthly, quarterly, and annual trends. Over time, you’ll know when trouble areas are coming and be able to plan for them better. Your goal is to financially prepare your business before periods of big spending so that you always have enough cash on hand to meet your business needs.
In the day-to-day of doing business, it’s easy to fall into the trap of believing a late payment here or there is no big deal. After all, your own customers probably pay you late all the time! But you can’t let yourself go there.
Not only are you setting yourself up for late payment penalties, failing to make timely payments on current debts will destroy your business and personal credit ratings (not to mention your relationships with vendors).
Don’t cause yourself unnecessary stress when proper management of your payables could easily fix the problem. Put a thorough system in place and hold to it. That way if true financial difficulty hits later on, you’ll have your own good credit and the loyalty of your vendors to help you get through the storm.
For small business owners who work with only a few vendors and cut fewer than a dozen checks per month, a basic spreadsheet is a sufficient system. When you’re juggling a larger number of vendors and suppliers, however, you may find you need more efficient tools.
Here are a few of our favorite small business accounting tools for managing your company’s accounts payable:
Companies dealing with a large volume of accounts payable may benefit from an AP automation system like Mineral Tree, which integrates with QuickBooks and some other accounting software. Mineral Tree allows you to manage your accounts payable from invoice approval to final payment in one simple interface, while maintaining a clear segregation of duties with email alerts and approvals to prevent internal fraud.
By far the most thorough accounts payable management option on our list, Mineral Tree is great for companies with serious accounts payable requirements, but it is beyond the needs of the average small business owner.
Considered the gold standard of accounting software by most professional small business accountants, QuickBooks has all the bells and whistles you could ever need for managing your accounts payable, receivable, and much, much more.
Of course, QuickBooks is more of a total accounting system than an accounts payable-specific tool. While it does have tracking and management options beyond a basic spreadsheet, QuickBooks is not specifically designed for accounts payable management. But unless you’re managing a large volume of invoices and vendors, QuickBooks would likely suit the majority of your accounts payable and other accounting needs.
If you’re looking for a full service accounting system with the best available accounts payable solutions, Xero may be your perfect tool. This cloud-based tool recently ranked first in GetApp’s quarterly roundup of cloud-based accounts payable solutions.
Through Xero, suppliers can send their invoices directly to your accounts, where you can follow a graph of your bills to decide when to pay which bills, manage your cash flow, and schedule vendor payments. We’d call it the most user friendly accounts payable system out of the full service accounting options.
Choosing an accounting tool ultimately comes down to a lot more than just payables, so you’ll need to compare all of your accounting needs to make the best choice for your business.
As a business owner, it’s essential that you have a crystal clear understanding of how every piece of your company’s financial management system works before you hand it off to a third party—and that includes your accounts payable.
But after you’ve been tracking payables for several months, especially if you are dealing with a large volume of vendors, you’re likely ready to hand of some of the day-to-day payables management to a trusted employee or administrator, or to a third party bookkeeping service.
Before delegating any parts of your payables process, make sure that you have clear procedures in place for that person to follow. If they suggest any changes to your payable procedures, make sure you understand those changes and stay hands on in the process.
No matter how big your business gets—as the business owner, it’s critical that you keep a close eye on the financial management process.
Regardless of whether the work you’re delegating involves basic data entry or cutting checks; whether you’re entrusting your payables to your sister, your favorite employee, or your best friend—you absolutely must have checks and balances in place to protect your company’s finances.
The unfortunate reality is that according to a report from the Association of Certified Fraud Examiners, at least half of small businesses will experience fraud at some point in their business life cycle. And while we’d all like to trust those closest to us, ACFE’s report found that accounting fraud is most often committed by a “loyal” employee.
Even innocent accounting mistakes can compromise trust and ruin relationships when they cost the company money. Protect yourself and your relationships by routinely checking invoices, payables ledgers, and checks to vendors personally to look for discrepancies. Set up accountability systems by not letting the same individual write, sign, and authorize checks, and perform regular unplanned spot-checks for errors or fraudulent activity.
If you have these procedures in place from the beginning, employees will know to expect them, which will keep them honest and avoid any hard feelings of mistrust because you suddenly want to check the books.
Once you understand all the moving parts and have a system in place, daily management of your company’s accounts payable really isn’t all that difficult. It’s simply a matter of staying on top of the small tasks every day.
That is, as long as your business has enough cash on hand to pay all your bills. But what happens when your slow sales month becomes two or three, when a major client is past due on a large invoice, or when an emergency expense depletes your cash reserves?
Suddenly what had become a mundane daily administrative task can turn into a high stress juggling act where one dropped ball is akin to business failure!
Before you panic, remember this: you are not alone. A huge number of small businesses hit bumps in the financial road from time to time. Some of those may even include your vendors themselves! The folks you work with know what it’s like to be in business, and many of them may be more understanding than you might think.
The key to surviving this difficult stretch? Be proactive and honest with your creditors—even when it hurts.
First, think about which creditors are most essential to keeping your business up and running. Which suppliers can you not live without? Talk to these vendors first. Gauge their willingness to work with you, but also prioritize these bills first so you continue receiving future shipments and services that you need to stay operational.
Next, start conversations with all of your creditors, in order of how essential they are to your business. A few straightforward conversations will help you determine who is going to be rational and work with you, and which jerks will refuse to tolerate any give-and-take.
Remember that you have more bargaining power here than you might think—especially with your suppliers who are small business owners themselves. After all, if you go out of business, they lose a customer—both your future business and likely most of the present money you owe them for products or services already rendered.
Demonstrate your loyalty to your vendors, and you may receive loyalty and compassion in return. We’re all just people, after all.
Once you’ve had those tough conversations and worked out a payment schedule with each creditor, do everything in your power to stick to that schedule as closely as possible. If your sales take a turn for the better, make an effort to pay creditors early—even a few days earlier than expected does a lot to show those who’ve worked with you that you recognize and appreciate their loyalty.
And if the tough times keep coming and you won’t be able to meet that payment schedule, go back to communicating with vendors as early and honestly as possible. The worst thing you can do in this scenario is cower in the shadows as a silently late payer—treat your vendors the same way you would want a late paying customer to treat you.
Creating a payment schedule for immediate payables is one thing, but in order to form a long term solution to your cash flow problem, you’ll likely need to cut costs. Look for ways to scale back your company’s ongoing liabilities and turn your cash flow around as you look to new options for increasing sales volumes. Ultimately, the long term health of your company’s accounts payable requires the revitalization of positive cash flow.
Of course, the ultimate goal of your accounts payables system is to be so organized and to foresee upcoming expenses so well that you can avoid serious cash flow issues before they ever happen.
So while managing your accounts payable isn’t a process that makes any business owner jump for joy, remember that in this case, an ounce of prevention is worth a pound of cure. Taking the time to create stellar accounts payable procedures now is an effort for which “future you” will be eternally grateful.