How to Improve Your Business’s Accounts Payable Practices

How to Improve Your Business’s Accounts Payable Practices

As a business owner, it’s important to understand the effect a well-managed accounts payable process can have on your company’s reputation and ability to acquire the goods and services you need to succeed.

In this article, we’ll explore the essential best practices for building a well-oiled accounts payable machine.

What is accounts payable?

Accounts payable is an accounting term that refers to the sum of your company’s short-term obligations to any creditors or suppliers. Basically, it refers to any bills your business hasn’t paid for the current month.

Accounts payable show up on your business’s balance sheet as a liability, and any increases or decreases in this balance will be reflected on your cash flow statement for the given time frame.

Many entrepreneurs will use these two facts to account for the different ways that accounts payable can affect their business’s cash flow.

For example, having exceptionally high accounts payable in relation to your business’s revenue over a specified period may make it harder for you to finance new equipment or take on more credit from a bank.

Similarly, paying your bills the moment you receive them may negatively harm your business’s cash flow by limiting your cash reserves, effectively reducing the value you can extract from your business’s revenue over the course of a month.

What are some common hurdles that business owners face when managing accounts payable?

Business owners will often face three main challenges when managing their accounts payable:

1. Slow or difficult internal processes for managing invoices—The first major hurdle lies in a business’s ability to accept, review and process invoices. Often, businesses will adopt an internal set of processes to ensure no invoices slip through the cracks. However, in some instances these processes can have the unintended effect of causing late payments.
2. Difficulty determining that invoices are legitimate and accurate—Businesses that receive a significant number of invoices may struggle with catching fraud or inaccuracies in the invoice amounts.
3. Optimization challenges for ensuring cash is managed effectively—Another challenge is balancing immediate invoice payment and improving your business’s cash reserves by holding payment until the invoices are due. Responsible accounts payable management means ensuring your business makes the best use of its available liquid funds at a given moment in time.

5 tips for improving your accounts payable practices

Taking proper care of your accounts payable can be a difficult but rewarding aspect of accounting and business management.

When done well, it can free up significant cash reserves for your business while strengthening your relationship with partners and vendors. However, when done poorly it can lead to fees, disruptions in your operations and difficulties maintaining valuable partners.

It’s important for business owners to implement several best practices into their operations structure to ensure timely payments of all amounts owed.

Note that most importantly, organization is the key to success when it comes to accounts payable.

1. Set up a single point of entry for invoices

Invoices can arrive at your business through a variety of channels and formats. When you receive invoices to multiple email addresses, in the mail and through other sources, it can be hard to make sure everything is paid correctly and on-time.

For this reason, it’s wise to adopt a single point of entry for all invoices coming into your business.

The method you choose is largely up to you, whether that’s only accepting digital invoices and forwarding them to your billing department or running everything through a vendor invoice management system.

In practice, the most effective way to manage your accounts payable is to centralize and standardize how you accept, manage and pay these invoices.

2. Choose paperless billing when available

Invoices sent through the mail carry the risk of arriving late and can minimize the time you have to strategically manage the account and maximize your cash flow.

It’s highly recommended that businesses opt for paperless billing when available to ensure they receive the invoice immediately and have the time needed to properly process and handle the payment request.

As the business world increasingly shifts to digital-first workflows, there are a variety of benefits to working with digital statements, from the ability to automatically import these statements into your bookkeeping software to being able to create a digital file of all invoices paid to a particular vendor or partner.

As an extension of this best practice, always look into your options for setting up automatic payments for regular payments to suppliers.

This way, you won’t have to worry about whether or not you’ve paid a particular account, and can instead focus your energy on strengthening the relationship or catering to your own customers.

3. Set up a system to confirm invoice payments and eliminate duplication

One important strategy for avoiding duplicate payments is to leverage your bookkeeping or vendor invoice management platform to mark which invoices you’ve paid and which ones are still outstanding.

Especially when your business receives tens or hundreds of invoices in any given month, keeping track of which ones you’ve paid is crucial for ensuring you don’t send a duplicate payment or miss an important bill due to an oversight.

However, it’s important to note that even electronic accounting systems have their limits when it comes to catching duplicate payments.

It’s important to keep your systems as real-time as possible to ensure the data you’re working with reflects the reality of your situation.

Similarly, it may be wise to set up a single bottleneck through which all invoices must flow before they are paid as a way of controlling the flow of money out of your business.

Often, this will involve strategies such as having your Chief Financial Officer (CFO) or an employee with accounting responsibilities manually sign off on all invoices before they are paid to ensure everything is properly tracked and accounted for.

4. Take steps to mitigate risk and reduce fraud

ACH fraud and other illicit financial transactions are common problems faced by business owners.

For this reason, you should ensure your accounts payable process has safeguards in place—both at the organizational level and with your business bank of choice—to identify and prevent fraudulent transactions from occurring.

Note, however, that preventing fraud will require more than just the transaction filtering systems provided by your bank.

Instead, you will need to cultivate a set of foundational skills at all levels of your company to share the responsibility of fraud prevention across your entire organization.

After all, properly documenting your vendors and partners and ensuring your business only deals with legitimate businesses are two of the best ways to prevent fraud because they minimize the risk that such transactions will make it to the billing department in the first place.

Make sure every employee with purchasing powers at your business is well-trained in modern fraud prevention practices, and take steps to include them in your business’s wider financial structure.

By making sure everyone at your organization is on the lookout for fraud and jointly responsible for its prevention, you can more readily identify and prevent any fraudulent invoices before they have a chance of becoming a problem for your cash flow.

5. Perform regular audits and work with your bookkeeper to ensure accuracy

Finally, you should work with your bookkeeper to set up a regular audit process that seeks to identify any cases of fraud present in your business’s transaction history.

While this system may not be able to reverse instances of fraud that have already occurred (you’ll have to speak with your banking partner for that), it can help you identify any potential holes in your accounts payable processes to reduce and prevent future instances of fraud from taking place.

Often, this process will include a regular review on a quarterly, semi-annual, or annual basis of all payments coming out of your business to see if any patterns or anomalies emerge in the data.

Work with your banking partner to improve your accounts payable management practices

When it comes to managing your business’s accounts payable, there are a few key strategies you should keep in mind:

1. Always set up a centralized location where you can review and process all incoming invoices.
2. Choose paperless billing when available so you’ll have a digital record of all your business’s transactions.
3. Establish processes and checks in your accounts payable system to both ensure all payments are accounted for and to prevent duplicate payments.
4. Work with your banking partner and your employees to establish systems to reduce and prevent fraud.
5. Perform regular audits to confirm your system is working and identify any areas for improvement.

Importantly, you should communicate regularly with your banker, bookkeeper and accountant to ensure your business is following best practices for managing your accounts payable.

Whether that’s implementing a vendor invoice management system or ensuring your accounts are as protected as possible from fraud, only financial professionals with a deep understanding of your organization’s workings can give you the insight and advice you need to improve your accounting practices.

If you have any questions about your business’s accounts payable practices or how your banking partner can help you establish a more robust system for interacting with vendors, schedule an appointment with one of our local bankers.

From strategies for maximizing your cash flow to recommendations for tools and solutions to help you manage your accounts payable, working with a local banking partner is often the most important first step in ensuring the sound financial health of your business.