As a small business owner, your focus is running and growing your business. You’re not an accountant, but you’re not big enough to have an accounts department. Which means that most of the financial side of things is down to you. Untangling all the arcane jargon can be a headache, so let’s start with a simple overview of ‘accounts payable’.
Accounts payable sounds like accountant-speak (which of course it is), but simply put: it’s the money that your business owes. This could include unpaid bills, invoices for office supplies, computer equipment and advertising expenses, as well as invoices for other supplies.
It appears on your balance sheet as a liability: a debt rather than a credit. Usually accounts payable are expected to be paid within 15, 30 or 90 days. You might have agreed a particular payment period with your suppliers, but if not, they will specify the terms on the invoice.
Why is accounts payable important? Because if you don’t settle your bills on time, you could face penalties and even more expensive legal action. Your credit rating could be impaired, and eventually your business could be forced into bankruptcy.
To effectively manage your cash flow and to stay financially fit, you need to be aware of how much money is coming into the business – accounts receivable – so you know if you can meet your accounts payable.
Here are some ways to streamline your processes and make this easier.
Track Your Bills
While you can manage your accounts payable with Excel spreadsheets, or even with an old-fashioned written ledger, it’s a lot easier with accounting software. All your financial data is organised in one place. You can see at a glance how much is owed and by when, as well as whether you have enough money coming in to meet your obligations.
Paying regular bills by direct debit helps keep you organised and prevents essential services from being cut off. If your business can’t operate without an internet connection, prioritise your telco payments. Software provides another way to automate payments. This saves you valuable time that you can then spend on other business activities. It also greatly reduces human error, such as entering the wrong amount or the wrong bank account number – or worse, sending duplicate payments.
The usual goal of a well-run accounting system is to keep money in your business as long as possible, while avoiding late charges. Using accounting software, you can enter and pay bills, manage bill due dates and schedule payments. You can also take advantage of early payment discounts, as some of your suppliers may incentivise early payments.
Being able to track progress over time is important in order to stay on top of your accounts. By generating reports at regular intervals, such as Unpaid Vendors Report, Accounts Payable Ageing Report or Vendor Detail Report, you can see if your debts are mounting or reducing over time. There may also be seasonal patterns which give you useful information: if you tend to have more money due in a certain season, such as higher energy costs or temporary staff for holiday cover, then you may wish to avoid capex (capital expenditures: buying more business assets) during this time.
Set Access Privileges
Anywhere that money is paid or received can be a high-risk area for fraud. You can develop policies and procedures to reduce this risk. For example, you can prevent someone from setting up a new vendor in your software without authorisation. This means a fake or fraudulent vendor can’t be created. You can also set access, so that different employees can only view certain areas of financial data.
It can take anywhere from 5 to 24 days to process an invoice from receipt through to settlement, which could put you in arrears. By using accounting software and automating your accounts payable, you cut both this cost and time involved as well as capturing more early payment discounts.