Accounts payable management is one of the most essential areas of focus in any organization, and it is crucial to know how to manage it properly.
Accounts payable (AP) is one of the line items in the balance sheet and represents the amount due to the suppliers and vendors for products and services purchased on credit. The management of AP is essential for ensuring that the business is not negatively impacted by late payments and that good relationships with the suppliers can be maintained. Here are some tips for effectively managing your accounts payable:
The first approach that an AP department can take to manage AP is to come up with a process that keeps track of the invoices received, approved, paid, and outstanding invoices. It is possible to involve IT digital tools such as QuickBooks in accounting or develop a system using Excel spreadsheets. Make sure to:
- Ensure that you have a system or method through which invoices will be received and then sorted accordingly. There are benefits associated with digitizing paper invoices such as scanning them and storing them in safe places.
- Input the invoice into your chosen accounting software and make sure you input the correct note such as amount due, date due, vendor information, etc… It helps later when running reports.
- Approval limits and the workflow should be defined to enhance accountability and eliminate unauthorized payments.
- Develop payment terms that should correspond to the due date of the invoice and your cash flow capabilities.
This results in being charged more money, receiving calls from collections having strained relationships with whoever the money is owed to, and higher interest rates. It is important to try to pay as many invoices as possible within a certain period, preferably before the due date.
For big, regular payments, create alerts on calendars in terms of due dates. Have an approval process in place so that there is sufficient time for the money to get to the vendors on time.
The following procurement strategies for improving the supply chain efficiency include; For instance, even if a company offers a 2% discount which is due 10 days earlier than the 30 days standard, the difference in amount is quite considerable.
The high invoice volume can be effectively managed through the help of accounts payable software and other advanced technologies. Benefits include:
- Invoice processing to work faster.
- Technologies such as approval through a mobile application while on the move.
- Digitization reducing paperwork
- Some of the reporting dashboards that would offer valuable information about the accounts payable are;
Other methods include electronic payment methods such as ACH, Wire transfers, and virtual card payments since they help in making payments faster and more secure as compared to paper checks. The AP process benefits when your accounting system is linked to your bank since payments are made efficiently and on time.
Apart from promptly paying the invoices, it is also important to keep communications with the vendors open to guarantee their continued provision of credit.
Explain to vendors if an invoice is to be paid later than expected they should do so due to some extraordinary circumstances. For instance, if a student fails to meet the set deadlines, he or she can explain, and this may ensure that penalties are not imposed while the relationship is maintained.
Ensure that the customers are made to pay vendors through easily understandable details such as the payment terms, the acceptable modes of payment, and the contact person for any inquiries about invoices or payments.
It is imperative to monitor how long invoices are aged out because it could easily fall behind on their payments. Here are helpful reports to review periodically:
- Aging balances totals report which presents outstanding amounts grouped by age categories such as 0-30 days, 31-60 days, and so on
- An AP aging report by vendor gives a view of vendors with balances that are outstanding and for how long
- Historical aging trends recognize vices that bring about poor aging and therefore a chance to change course.
That is why having well-defined procedures for contacting vendors with past-due invoices can protect relations with partners.
All these Accounts payable best practices entail investment at the initial stages but, in the long end, it is advantageous since it minimizes cases with the vendors, audits as well and cash flow. For more information on how to improve your AP operations, they are welcome to call us.
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