If you’re running a business, it doesn’t matter whether you’re an independent contractor or a growing company, managing accounts payable is a key part of your everyday business administration.
Simply put, accounts payable is the process of tracking money owed by your business to suppliers. As a new business owner or sole proprietor, this can be done with a simple spreadsheet. But as your business grows, so does the complexity of your accounts payable process.
Here are some tips for setting up a workable accounts payable system that will scale with your business and help you get a better grip on cash flow and other financial reports.
Setting Up Your System
Whether you are using a traditional spreadsheet or an online accounting program such as QuickBooks, FreshBooks, Harvest or Expensify, you’ll need to start collating all your receipts, credit card expenses, and incoming bills from suppliers and enter them into your system.
For spreadsheet users, you’ll need to set up your file to capture the following line items:
- Supplier’s/biller’s name
- Account number
- Expense type (e.g. office supplies, raw materials)
- Date the invoice was received
- Amount owed
If you’re not sure whether to make the move to an automated program, as a general rule, if you’re receiving more than two bills a day, or your expenses are racking up, then it’s a good idea to look into automation as an option to help you keep track of your bills. Many of these tools are free or available on a trial basis. If you need some training to get you up and running, contact your local Small Business Development Center, Women’s Business Center or other local small business assistance resources about training opportunities.
So, what data goes into accounts payable and when?
Start a daily regimen of entering incoming bills (note the payment due date and any other account information that streamlines the payment process your end). If you incur a business credit card expense, enter it on the same day. Employee expenses should also be entered (avoid fraud and streamline these by using automated expense entry programs or consolidate all employee expenses on a single credit card). Don’t forget to keep and securely store paper copies of all your documents too.
Tip: Make sure you own your own accounts payable system until you feel comfortable handing over the data entry to someone else (even then, be prepared to check it daily – you should know what’s going on with your money).
Make a habit of paying your bills on a weekly basis and establish a window of payment that aligns with your supplier’s terms. If their terms are 30 days, don’t wait the 30 days to pay them; mail out the check or make the direct deposit payment a few days in advance of the deadline. This way you’ll maintain good relations with your vendors.
When combined with your accounts receivable system (incoming payments) your accounts payable system will help you stay on top of cash flow and inform your overall budgeting management process, i.e. plan for busy periods when outgoing costs outweigh incoming cash.
It’s inevitable that there will be times when cash flow is tight and paying bills on time can be challenging. Try not to bury your head in the sand; instead, be proactive. Refer back to all your suppliers’ terms to see if their payment windows allow for any wiggle room (for example, if you’ve been paying bills every 30 days, but in fact their terms are 45 days). If you know you can’t cover a payment this month, call your supplier and be honest: tell them you’ll make a minimum payment this month, and X amount next month until it’s paid off. While it’s not an ideal situation, and you may have to pay interest, it demonstrates to the supplier that you are proactive and serious about making payments. If you have a strong record of past payments, remind them of that fact and do whatever you can to reassure them of your business viability.
When to Hire an Expert
If your accounting system is taking up too much of your time, then you may want to enlist an assistant to help with some basic bookkeeping, or hire or outsource to an accountant.
As your business grows, you might even want to consider the services of a full- or part-time CFO. More than just a bookkeeper, payroll administrator or keeper of P&L and cash flow statements, a Chief Financial Officer (CFO) can help you plan, model, forecast and make better business decisions. A CFO looks at your business holistically – this includes people, processes and systems – and ensures that together you have accurate financial information to plan for the future.