Accounts Payable: Organizing Your Company’s Payments
Accounts payable means keeping track of what you owe and when you owe it, so that bills are paid on time, no payments are missed and your credit rating and vendor relationships remain intact.
The total you currently owe appears as a liability line on your balance sheet and it includes all purchases and bills that are made on an account, to be paid off within the next year or operating cycle (whichever is the longer of the two). It doesn’t include items paid in full right away or large amounts owed, such as a 10-year loan.
“You accrue various types [of invoices ]— you might have a credit card bill due on the same date every month. You might have inventory with a 45-day remittal period without interest or late fees,” said Kate Porter, principal of Pendragon Accounting. So with the help of that accounts payable data, “you’re going to look at the amounts and how long you have to pay it. It’s very useful for cash flow.”
Small businesses can get a good sense of the outgoing cash, and as time goes on, be able to predict what their cash flow will look like monthly, quarterly and even annually.
“If you know that in 45 days I’m going to need $500 to pay, it’s a helpful tool,” Porter said. “If you keep on top of it, you’ll never find yourself short on payments.” If it’s possible, you can even make an effort to regularly get those invoices paid early, and reinforce healthy relationships with your suppliers.
As with other measures of a business’s fiscal health, accounts payable may also be helpful with finding investors or when you are applying for a loan.
How to set up an accounts payable spreadsheet
For a new business, setting up the accounts payable system and the accompanying data entry may feel tedious, but it’s worth the effort (and doesn’t have to be complicated).
So if you’re going to set up your own spreadsheet to track accounts payable with a program such as Microsoft Excel or Google Sheets, here are columns to consider:
- Vendor’s name: Enter the name of the supplier you have an account with.
- Account number: This may help you get faster service if you call with questions.
- Invoice number: This can help matching this line with the digital or paper bill if you need to refer to it at a later date.
- Category: What type of expense was this? Was it inventory, a business supply or something else?
- Date of invoice received: This is another information point that could prove useful if any issues arise. This may be different from the actual date on the invoice.
- Amount due: Enter the amount to be paid.
- Payment deadline: Enter the due date.
- Status: Where you are in the payment process, for example, “payment mailed on X date,” or “past due,” etc.
You can create a new spreadsheet for each month or, if your program allows, create a new tab for each month of the year.
At the time you receive each bill, add the above information to the spreadsheet so it doesn’t slip through the cracks.
Another important aspect to consider is who is in charge of handling data entry. Is it just yourself or do other employees have access? If you’ve handed off the task, be sure to monitor accounts payable regularly. You should also hold onto the task of signing accounts payable checks. This is not just for monitoring cash flow, but to make sure everything is being reported and represented accurately and honestly.
|Invoice Sender’s Name||Account Number||Invoice Number||Category||Date Invoice Received||Amount Due||Payment Deadline||Status|
|Supplier 1||1234555566||0024||Office supplies||9/20||$212||11/01||Payment received|
Tools for managing accounts payable
At the most basic level, “the main thing you’re keeping track of are a list of amounts of money and a list of due dates,” Porter said. That data can be entered in a spreadsheet, in a ledger or even written on a piece of paper. So the tool you choose to manage your accounts payable depends on the type of business and the volume of invoices you need to track.
“Most good accounting software is going to have a pretty robust tracking system,” Porter said, and those include the big guns, like QuickBooks and Xero. For businesses that deal with more invoices, Xero’s system is more geared toward invoice processing. In fact, your suppliers can send them to your Xero account and generate charts and graphs so you can see what’s owed and decide when to pay.
A prominent choice in cloud accounting solutions is the cash flow management system Bill.com. You can enter invoices manually or set it up to have accounts you can pay online and import on a monthly basis. It can keep track of due dates and once your business checking is linked, bills can be paid with one-click authorization. “It tells you on your homepage how much you have to pay in the next 30 days,” Porter said. “They’ll keep records for you. It’s a really nice tool if you want to literally only keep track of one thing (and it’s) probably one of the easiest ways to do it.”
Some of Bill.com’s other functions include an approval feature, so you can submit bills to approvers for review. So if you’re using QuickBooks, Xero or another accounting software, they can send all your bill payment information to that system.
MineralTree’s Invoice-to-Pay feature automates payments and integrates with accounting software. For companies with high amounts of invoices (100 to 10,000 per month) MineralTree offers FlexPay.
Need business funding? Learn more about small business loan options here.
When to hire an accounting professional
If all you’re looking to do is keep track of your bills (and there’s less than 100 in any given month), you can probably do most of it on your own.
However, companies with a high volume of invoices should consider hiring help with accounts payable to avoid falling behind. If a retail business is buying a lot of inventory from many suppliers with varying due dates, “it’s a huge time sink for them,” Porter said. “It’s worth it for them rather than to miss payments, [and get hit with] late fees. You can get someone to do it for not a whole lot of money. If you’re missing payments, it’s probably going to pay for itself in the long run.”
The bottom line
Whether your accounts payable system is just two columns on a piece of paper or eight columns in a multi-tabbed spreadsheet, setting up an accounts payable system is a straightforward process. It’s important to understand how to handle it yourself, even if you don’t personally continue to maintain it as your small business expands.
“You can and should be doing it from the very first stages of your business, long before you think about hiring support people” Porter said. Even after you delegate it to others, it’s crucial to check in regularly and check the pulse on your business’s cash flow.