The benefits of accounts payable: A strategic guide to improving cash flow

The first thing that usually comes to mind when cash flow isn't ideal is chasing down customer payments. But in doing so, you might be overlooking the power of strategically managing what you owe.

Accounts payable (AP) is a current liability on your balance sheet that represents the funds your business owes for goods or services already received. 

If you're managing this manually, you're creating extra work and risking errors that hurt your cash flow. In fact, in a recent QuickBooks survey, more than half (54%) of businesses reported "too many manual and repetitive tasks" as a top challenge with their current software. 

Today, we’ll define accounts payable and how to set up an effective process for accounts payable management.

Jump to:

• What is accountsd payable (AP)?
• The 5 essential steps of the accounts payable workflow
• The core benefits of accounts payable automation
• Strategic AP management tips for maximum cash flow
• Spend more time growing your business

What is accounts payable (AP)?

Accounts payable is the funds due to subcontractors or vendors for goods and/or services. The accounts payable balance includes bills and other liabilities that must be paid over the next few months. 

Any good or service that the company purchases should be listed as accounts payable on the balance sheet. 

Some examples include:

• Leased vehicle
• Subcontractor
• Equipment purchased
• Materials used for production

Accounts payable is a component of the liabilities balance in the balance sheet equation:

Assets - liabilities = equity

Balance sheet accounts are separated into current and noncurrent accounts.

The components of accounts payable

Accounts payable refers to your current liabilities—obligations that must be paid within the next 12 months. 

Current liabilities also include:

• Trades payable: Some firms use trades payable to record bills received from suppliers. Other companies post the supplier invoices to accounts payable and don’t use the trade payable account.
• Short-term debt: The principal and interest due on a loan are posted to current liabilities. If a firm owes $4,500 in principal and interest over the next 12 months, for example, the balance is a current liability.
• Credit card balances: Amounts due on credit cards are posted to current liabilities.

The accounts payable balance impacts your business’s cash flow. By strategically timing these payments, you can maintain a healthy cushion of funds to cover unexpected expenses.

What's the difference between accounts payable vs. accounts receivable?

Accounts payable is the money your business owes to suppliers or vendors. Think of it as the bills you need to pay. When you purchase goods or services on credit, those amounts go into accounts payable until you settle the debt. Managing accounts payable efficiently ensures you maintain good relationships with your vendors and avoid late fees.

On the flip side, accounts receivable is the money owed to your business by customers. When you provide goods or services on credit, the amounts due are recorded in accounts receivable until you receive payment. Keeping a close eye on accounts receivable helps you ensure timely payments from customers, which is vital for maintaining a healthy cash flow.

Let’s use the example of Ensconced Cafe to illustrate:

Accounts Payable (AP): Ensconced Cafe recently purchased a high-end commercial espresso machine on credit from Barista Supply Co. The total amount the cafe owes to the supplier for this equipment is recorded as Accounts Payable until the invoice is paid.

Accounts Receivable (AR): Ensconced Cafe provides full-service catering for a company breakfast at Technology Central Offices and issues a $2,500 invoice. The $2,500 that the office owes the cafe is recorded as Accounts Receivable until the payment is received.

Maintaining a clear record of both accounts payable and receivable will help your business effectively manage cash flow. Then, you can better gauge when you have enough cash on hand to cover their bills while also tracking incoming payments owed to them. 

Using a platform like QuickBooks automates this process by syncing your bank feeds and providing real-time dashboards, making it easy to see what you owe and what you’re owed. 

How does accounts payable impact your business's cash flow?

For small business owners, AP is not just about paying bills; it's your primary lever for managing cash flow. Every dollar you owe must be strategically balanced against every dollar you are expecting to receive. 

To manage this delicate balance proactively, you must use a cash flow forecast to plan payments strategically. You are essentially tracking the flow of money using four key line items:

• Beginning cash balance: How much cash you started the month with.
• Cash inflows: Money received primarily from accounts receivable and other revenue sources.
• Cash outflows: Money paid out for accounts payable (vendor bills), inventory, rent, and payroll.
• Ending cash balance: The final number, which becomes the starting balance for the next month.

To work productively, you need to design an efficient system to manage the payment process.

The 5 essential steps of the accounts payable workflow

To effectively manage accounts payable, you must post transactions using the accrual basis of accounting.

Let's walk through the five steps of the accounts payable process: 

1. Use accrual accounting

Accrual accounting requires firms to post revenue when earned and expenses when incurred. All businesses should use accrual accounting so that revenue can be matched with expenses, regardless of the timing of cash flows.

The accounts payable department should use accrual accounting to post transactions and for financial reporting. To set up a clearly defined process, meet with your AP department. If your business is smaller, a bookkeeping employee may handle accounts payable.

2. Issue the purchase order

Most spending decisions require a purchase order (PO). Assume, for example, that Acme Manufacturing needs to order a $10,000 piece of machinery. Before the order is placed, the plant manager must complete a PO, which lists the machinery’s price and other details.

The owner or someone else with financial responsibility (like the CFO) approves the PO. At this point, the order can be placed. Small purchases, such as $40 in office supplies, don’t need a PO. Generally, POs are used only for larger purchases over $1,000. Purchase orders help a business control spending and keep management in the loop of outgoing cash. 

3. Receive the vendor invoices

When the order is placed, the vendor will send an invoice. The person responsible for accounts payable tasks should record the following information in the accounting system:

• Due date: The date when the invoice should be paid
• Payment terms: Some vendors offer a discount if the invoice is paid within 5-10 days. If a discount is offered, you may decide to pay the invoice in a shorter period of time.
• Contract information: Includes the vendor’s name, address, email, and the client’s invoice number. If the vendor takes electronic payments, include that information with the invoicing data.
• Purpose: If you need to plan the payment for larger purchases, include a description of the purchase.

When the item is received, the vendor should include a shipping receipt.

4. Request a shipping receipt

The shipping receipt details what the vendor sold to the customer. The receipt includes a description and the number of items included in the shipment.

The data on the purchase order, invoice, and shipping receipt should be the same. Reviewing these documents ensures that the order was approved and that you received the items that were ordered.

If the data matches, the accounting department can generate a check. The owner should review all of the documents before signing the check and paying the invoice.

In addition to managing paperwork, the AP department needs to post accounting entries.

5. Post general ledger entries

The accounts payable department posts journal entries into the general ledger. A journal entry contains all of the information needed to record a transaction. There are two common journal entries for accounts payable: a purchase on credit and an invoice paid in cash.

Let's unpack this using the example of Acme Manufacturing purchasing a $10,000 piece of machinery on credit:

• Purchase on credit:
• The business receives the machinery (an asset). This increases the Machinery Asset account by $10,000.
• The business takes on a debt (a liability). This increases the Accounts Payable Liability account by $10,000.
• Invoice paid in cash:
• The business pays the vendor, settling the debt. This decreases the Accounts Payable Liability account by $10,000.
• The business's cash goes down (an asset reduction). This decreases the Cash Asset account by $10,000.

It's worth noting that this manual process of tracking, posting, and matching debits and credits is where accounting errors are very common. This makes this a great area to implement accounts payable automation software like QuickBooks. 

When you pay vendors and contractors, QuickBooks automatically records the transaction and matches it for you, ensuring your ledger is accurate without the manual effort.

The core benefits of accounts payable automation

According to the QuickBooks Business Solutions Survey, 95% of respondents report challenges with their current digital business solutions. Without a well-defined accounts payable workflow, you might face late payments or strained vendor relationships.

Automating your accounts payable process can transform the way you manage your business finances. Some of the benefits include:

Cost savings and increased efficiency

Manual AP processes are expensive and slow. Industry data shows that the cost to manually process a single invoice can be more than $15 when factoring in labor, paper, and storage. And in this day and age, you can't afford that. 

Automation can help you cut costs and improve efficiency in the following ways: 

With QuickBooks Bill Pay, small business users report they can cut down manual entry by over half when recording bills, freeing up hours every week.

By streamlining invoice intake and payment execution, you reduce the time spent on administrative tasks, allowing you or your team to focus on revenue-generating activities.

Automation allows you to track and pay invoices precisely when they are due, ensuring you never miss a valuable early-payment discount.

Enhanced security, fraud prevention, and compliance

Fraud is a persistent threat to small business operations, and staying up to date on security and compliance can be challenging. Manual accounts payable processes, in particular, are highly vulnerable to duplicate payments and false invoices. 

Automating accounts payable with a modern software solution like QuickBooks elegantly solves for this by creating a digital audit trail. All your records, approvals, and payment confirmations are stored digitally and protected against threats. This digital audit trail is crucial for tax season and ensures seamless compliance with regulatory requirements.

Improved accuracy and real-time financial visibility

As a small business owner, you cannot afford to manage your business based on outdated or incorrect financial data. But the longer it takes to manually enter, approve, and match vendor invoices, the less accurate your cash picture becomes.

With automated accounts payable, you gain real-time insights into your financial status. You can easily track pending invoices, payment statuses, and overall cash flow, allowing you to make informed decisions quickly. If a large payment is due, you know immediately whether to hold off on an inventory order or move forward with a new hire.

Strengthening vendor relationships

Sometimes, a positive vendor relationship can lead to money directly in your pocket. Consistent, timely, and accurate payments are a great way to build relationships and get bonus benefits—and automation helps you always pay on time. 

When you're a client that vendors value, you can expect benefits like: 

• Suppliers are far more likely to grant you better credit limits, faster order fulfillment, and priority support, especially during supply chain crunch periods.
• Automation guarantees bills are paid promptly, eliminating late fees and the need for stressful back-and-forth communication regarding missed deadlines or payment status.
• A strong payment history increases your leverage, so you can even ask vendors to extend payment terms or offer higher volume discounts because they know they can rely on you.

Embracing accounts payable automation with accounting software means better efficiency, accuracy, and growth for your business. 

QuickBooks transforms your workflow by allowing you to snap photos of receipts, automatically matching bills to bank transactions, and then scheduling automated payments to ensure you never miss a due date. By centralizing these tasks, QuickBooks helps you take control of your small business finances. 

Strategic AP management tips for maximum cash flow

You should monitor accounts payable and make changes to improve your business. 

Here are three valuable ways you can improve your accounts payable management:

Optimize the accounts payable turnover ratio

Purchases on credit increase the accounts payable balance. Accounts payable turnover is the total purchases on credit divided by the average accounts payable balance. The period measured is typically a month or a year.

Let’s assume that a business buys a large dollar amount on credit in March, and pays the invoices right away. The March purchase balance is high, but the average accounts payable balance may only be a few days. If you increase the accounts payable turnover ratio, you’re paying for credit purchases faster.

To conserve cash, you may want to take more time before you pay invoices. If most of your invoices are due within 30 days, you can delay payment until you collect more money from customers.

Use the aging schedule to prevent late fees

An aging schedule separates accounts payable balances based on the number of days since the invoice was issued. Acme Manufacturing, for example, has $100,000 in payables from 0 to 30 days old, and $15,000 due in the 31-to-60-days-old category.

The aging schedule helps you decide when invoices must be paid. The vast amount of your payables should be in the 0-to-30-day-old category. Since most invoices are due within 30 days, you don’t want many outstanding invoices unpaid beyond 30 days.

If you wait too long to pay, you may damage your relationship with the vendor. Reliable vendors are important, and you need to pay them in a timely manner. Take action to manage accounts payable.

Simplify your accounts payable workflow with QuickBooks 

QuickBooks is designed to remove friction from the entire procure-to-pay cycle. By integrating QuickBooks Bill Pay, you can streamline invoice processing and save valuable time, which you can reinvest in your business growth.

If you're looking to improve your accounts payable workflow, here are some ways that QuickBooks can help: 

• Pay vendors your way: Choose to pay via ACH or paper check directly within QuickBooks; the system even handles the mailing for you, so you don't have to hunt for stamps or envelopes.
• Set up payment reminders: Use QuickBooks to set up alerts for upcoming due dates, ensuring you never miss a payment deadline again.
• Leverage accurate forecasting: You can use the real-time cash flow data inside QuickBooks to confidently negotiate with suppliers, so that you always know that you can pay when the bill comes due. 
• Run automated reports: It's easy to perform reviews and run reports using QuickBooks, since your financial records are always up-to-date and ready for audit.
• Get ready for tax season: All invoice, approval, and payment data is accurately recorded and instantly accessible within your QuickBooks file, safe and ready for tax preparation season.
• Monitor cash position: You can keep a close eye on your cash position by checking the dashboard and ensuring you have sufficient funds to cover any upcoming payables.
• Utilize AI agents: Take advantage of QuickBooks AI agents, which can automatically capture invoice details and flag unusual spending patterns, making manual data entry a thing of the past. 

This shift to an automated, centralized platform makes implementing Generally Accepted Accounting Principles (GAAP) simple. It's a necessary part of business accounting in the digital era—and can save your business significant time and money. 

Spend more time growing your business

Getting your accounts payable system in shape might feel overwhelming, but the right tools can make it a breeze. Take a good look at your current accounting software and AP processes and consider where you can make improvements.

With QuickBooks Bill Pay, you can centralize your entire accounts payable workflow—from receiving a bill to issuing the final payment—all within a single secure dashboard. This not only simplifies your process but also scales up your security as your business grows.

Disclaimers

QuickBooks Bill Pay: QuickBooks Bill Pay account subject to eligibility criteria, credit, and application approval. Subscription to QuickBooks Online required. Not available in U.S. territories or outside the U.S. Money movement services are provided by Intuit Payments Inc., licensed as a Money Transmitter by the New York State Department of Financial Services. For more information about Intuit Payments' money transmission licenses, please visit https://www.intuit.com/legal/licenses/payment-licenses/.

Reduce manual entry by 57%: Based on U.S. QuickBooks customers who record bills in QuickBooks using automation tools on the Apps/Bills page compared to customers not using these tools, from February 2024 to January 2025.