Accounts payable is a crucial part of your company’s financial statement. It likely makes up the majority of your business’s outgoing cash, for expenses like bills and payments to vendors. If you do not anticipate your current debts by tracking accounts payable, you won’t be able to accurately evaluate your financial stability or plan for future expenses.
Properly recording and tracking your accounts payable also ensures you are up to date on your debts and not missing any important payment deadlines. Below, we’ve defined and outlined the process of setting up and maintaining your business’s accounts payable.
What is accounts payable?
Your accounts payable includes all outstanding bills you owe for goods purchased and services received, excluding payroll costs. These expenses are not immediately paid and are considered “liabilities” in your accounting books.
For example, let’s say your business needs equipment and you charge that equipment on a company credit card. Until you pay off that purchase on your card, the purchase will be recorded in your accounts payable.
Accounts payable exists to ensure you aren’t past due on any payments and allows you to consider your liabilities versus your assets to accurately project cash flow. Like your accounts receivable, which is the money owed to your business by clients or customers, accounts payable is an important part of your balance sheet and must be regularly reviewed.
[For more, see: Top 3 Ways to Improve Your Small Business Accounting.]
Setting up your account
To set up your accounts payable, consider using an accounting software, like QuickBooks or FreshBooks. From there, you will collect and organize all of your receipts, credit card expenses and incoming bills.
The SBA recommends setting up your accounts payable spreadsheet to include the following items:
- Supplier’s/biller’s name
- Account number
- Expense type
- Date the invoice was received
- Amount owed
Using this outline will make recording and managing payments a more seamless process, regardless of its size.
If you are receiving more than two bills per day, the SBA advises automating your accounts payable tracking, rather than manually recording each expense.
Recording and scheduling payments
According to Accounting Coach, you should implement the “three-way match,” which assures you only record and pay valid invoices. While you don’t want to assume your vendors are trying to rip you off, mistakes happen, and you can never be too careful.
To determine the accuracy of your invoice using this technique, you must compare the details of the following to ensure they are consistent with each other:
- The company's purchase order
- The receiving report
- The vendor invoice
If there is a “three-way match,” you should then proceed recording and paying the invoice.
If you are receiving more than two bills per day, the SBA advises automating your accounts payable tracking, rather than manually recording each expense. All costs, including employee expenses, should be entered into your account right away, including the payment due date. That way, you can arrange the invoice dates accordingly to ensure you are scheduling payments in advance.
If any problems should arise, and you find money to be tight one month, don’t panic. Take advantage of any flexible payment terms your vendor may provide, such as a minimum payment amount or billing grace period.
If your vendor does not provide much wiggle room and you are unable to make a payment by the invoice due date, give as much advance notice as possible. Ask if there is any possibility of working out a payment plan or alternative arrangement to ensure you can pay your bill while still meeting your business’s other financial obligations.
Your accounts payable is just a small factor of your company’s overall finances. However, maintaining your scheduled payments is a critical process that should not be overlooked or neglected.
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