In the business, the flow of funds in and out of the organisation is very essential as it provides enough money for the organisation to operate effectively. Accounts payable and receivable are like blood flow for the organisation.
When any amount which is still pending to be paid after receiving related products or services, then this amount is categorised as accounts payable, and is entered in the same journal entry.
Proper management of accounts payable improves organisational image, and strong supplier relationships, supports to enjoy trade and credit discounts upon payment and increases business credibility in the market.
This blog will make you understand the reasons and concepts behind accounts payable, and why it is equally important to pay your bills on time.
What does accounts payable mean?
What is accounts payable is the major question most of the people have, and the simple answer to this is that, it is the current liability which occurs when you purchase goods from the suppliers, but the payment is whole or partially pending.
The outstanding amount or the amount for which the goods are been credited is been recorded under account payable in the journal entry during bookkeeping.
After payments are done, the deducted amount from AP is been added to other expenses for sales, purchase or other expenses based on nature of transactions.
In short; accounts payable (AP) is the amount which is pending to be paid, and it is temporarily recorded in accounts payable until it is paid and deducted to be added in relevant other entries.
How accounts payable works
To understand the accounts payable and its importance, one must know how AP works and how it is recorded, categorised and settled. The process is explained with one simple example.
Receiving goods and services: Upon ordering for cotton (for textile), the suppliers and vendors send the required goods and services to your organisation.
Review the invoice and its processing in the system: The supplier sends the invoice for the cotton with details for rate, quantity, amount, payable amount, due date, credit period, and payment terms such as early payment discounts, late payment charges and more.
Approve invoice: By matching the invoice with the purchase order and the received goods, the invoices are sent to accounts for approval and initiating its payment process. Various departments that received the goods, including inventory, warehouse, and purchase manager approve the same.
Transaction recording: Assume the credit period to be 30 days; the amount for the cotton on credit is recorded in accounts payable in the accounting system.
Process payments: Payments on any outstanding accounts are done at this stage considering the priority of early payment discounts, late pay interest or charges and the need for further orders, etc. Upon payment, the cotton amount is deducted from the accounts payable entry.
How AP can help your business
Improved efficiency: Automating or standardising the payment tasks streamlines the process and improves brand image while it increases the efficiency of the payment, and reduces payment tenure.
Accuracy: Standard procedures or processes as above reduce chances for errors since all aspects for charges or interests are considered, and stocks have 3-way checks for accuracy.
Save more: You can save more with early payment discounts, where you can easily prioritise such payments and save more.
Strong relationships: You can have strong relationships with suppliers and vendors by ensuring timely payments and this helps you to have high credibility in the market.
Proper cash flow: Prioritising transactions and payments ensures timely payments and thus ensures enough cash flow for day-to-day business operations and expenses and improves financial health.
Accurate bookkeeping: Proper AP ensures proper recording of transactions and with all documents, invoices and details for tax payments and audit purposes and ensures transparency.
How to improve Accounts payable in your business
With years of experience and analysis, our experts have come up with some of the best practices which you must follow during accounts payable to ensure the best operations.
Track invoices: Ensure to manage and store vendor and supplier details in one place including other details for payment terms, credit period and more. You can manage the master vendor file.
Payment reminders: Don’t make a mistake to miss another due payment date. Keep reminders, schedules or online reminders to make you aware of upcoming priority payments.
Streamline payment process: Work to streamline and simplify the payment process, and make it easy to pay the vendors via their payment channels. Identify and keep track of such channels to eliminate lengthy processes.
Summary generation: Create and maintain summaries and reports to see outstanding amounts, paid amounts, upcoming amounts for various vendors and more. It allows the forming of further payment strategies.
Simple reconciliation: The reconciliation process is very important and must be followed to ensure your bank records match with your payments to look for discrepancies or issues.
Leverage technology: The use of technology is very essential as it leads to automation and reduces the time taken for efficiency and it can easily adapt to vendor platforms for automated payment and eliminate late payment charges.
You can use accounting software, AI and other unified online payment channels, etc.
Supplier relationship: Maintaining strong relationships allows one to easily resolve conflicts, extend credit period when needed, and have low-rate resources, etc.
These are some of the important practices which your business should ensure for effective, accurate and efficient accounts payable management.
Accounts payable is very essential for your operations to keep going, and thus knowing core concepts and using best practices for AP ensures strong relationships, savings and organisational growth with competitive advantages.
Does this all seem like a headache to you? Don’t worry at IntQBooks; our accounts payable recording services offer all of these. We leverage technology with experienced bookkeepers to ensure the best accounts payable management.
Get reports for your business’s financial health clear recording for every transaction, and proper access. Contact us today; and schedule a free meeting today to know how exactly we can help you.