The Basics of Accounts Payable – For the New Accounting Professional or Business Owner

Are you a fresh graduate with an accounting degree, tasked with managing an accounts payable department at your new job, a new accounts payable employee, excited to dive into your new role as the person who keeps all bills paid in a timely manner, or a small business owner with no idea of where to begin in the efficient management of your company’s accounts payable process? 

If so, then I am sure you may be feeling a little overwhelmed and unsure of what all needs to be done to ensure that everything gets completed correctly and meets all compliance with IRS and any state(s)’ tax guidelines.  The accounts payable process is one that often requires extreme detailed, organizational and time-management skills. 

As a tried and true expert with almost 20 year of experience managing the accounts payable process of both small and large organizations, I would like to provide you with a few of the most basic and simple tips that I have learned over the years for maintaining a very streamlined, organized and deadline oriented accounts payable function.  The first and most important thing that needs to be understood is the definition of accounts payable and how it impacts your business.  Secondly, implementing the basic steps of an efficient accounts payable process can be crucial to minimizing bad vendor credit scores and meeting tax deadlines.  Finally, we will discuss some options for automating your accounts payable processes so as to eliminate wasted time and resources for your company.    

What is Accounts Payable and How Does It Impact Your Business?

Let’s first discuss the definition of accounts payable for your business or employer.  Accounts payable in basic terms is everything that your business or employer owes to debtors.  This can include all purchased office supplies, manufacturing parts, building & grounds maintenance, employee training, meals & reimbursement for sales personnel to capital equipment, company loans, and more. 

Accounts payable is one of the most important key indicators of how your business is performing on a monthly basis.  For example, if in any given month, your company owes out $200K in outstanding accounts payable but you have only $100K due in from accounts receivable (what your customers’ owe to you), $50K cash in your bank, and maybe another $10K new sales orders, then you are in a $40K overall cash deficit.  This is not a good situation.  Therefore, we move on to the next important aspect of managing accounts payable, understanding the accounts payable process.  

What is an Efficient Accounts Payable Process?

An efficient accounts payable process can do many important things for your company, such as preventing the doing of business with illegal companies, eliminating bad credit scores, meeting tax deadlines, reducing duplicate payments and maximizing overall cash flow.  What is a great accounts payable process?  Let’s discuss 5 essential steps.

  1.  Do not set up a vendor account unless you have obtained a W-9 (or W-8BEN for international suppliers) and Certificate of Insurance from the vendor.  This process will ensure that you are not doing business with an illegal company nor participating with a company that could sue you for getting hurt on yours or your customer’s site because they do not have their own liability insurance. Plus, you will already have all important documentation for meeting 1099 tax deadlines each January.
  2. Pay all bills on time based on agreed upon pay terms with supplier.  A bad credit score with any company can greatly damage your business reputation.
  3. Research all state sales tax rules and payment deadlines so that you know when and how much to pay for all purchases and services.
  4. Set up internal procedures for minimizing duplicate payments to vendors.  An example would be to ensure that all employees responsible for entering invoices into your system follow same guidelines such as using consistent invoice numbering (invoice number with no dashes, spaces, or characters…only numbers), or that they do not enter a copy of an invoice, only use originals. 
  5. Maximize cash flow by only paying invoices due each week.  If your company is dealing with cash flow issues, it is best to only pay what is due each week or so.  Most accounting software systems have a way to pull into a payment run only what is due within a certain date.  Get with your software system IT consultant to find out the best way to deal with this issue if necessary.  There is no need to pay anything not due yet.  It is better to let the money sit in a money market or CD account earning interest.

What Are Some Ways to Automate Accounts Payable and Why?

With any company these days, there is always the question of how to automate business processes so as to streamline and eliminate unnecessary employees and tasks to reduce costs.  Accounts payable is one of the number one easiest process to automate in any company, small or large.  This can be done in several different ways.

  1.  Talk to your company’s bank representative on setting up vendor payments by credit card or electronic payment.  There is no need for expensive check writing anymore, unless they are for a utility or phone company.  That is about it.  Even those type of payments can be made online via ACH debit.  The time of cutting manual checks, signing them, stuffing into envelopes, applying postage, etc., is just a huge waste of time and money for your company.
  2. Purchase an expense management software system that streamlines all employee travel and expense reimbursement transactions.
  3. Outsource your AP to a third-party company, one that utilizes cost-saving technologies.  Contact me today at info@thedeeperpocket.com for consulting or other accounts payable management advice.

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