If you are a business owner, your role likely includes managing the company’s finances. Whether you have a team of accountants and bookkeepers or if you do the work yourself, there are several aspects of this process that can be quite tricky.
One important area is accounts payable.
In this guide, we will explore what it means to have an effective AP (or Accounts Payable) system in place—including how to keep up with your invoices and make sure they get paid in full on time every single month.
Start by creating an accounts payable policy
The first step in the accounts payable process is to create an accounts payable policy covering all aspects of your organization’s payment practices. An effective policy will help you:
- Ensure that payments are made on time and accurately.
- Prevent overpayments or late fees from occurring due to confusion about who has authority over invoices, who should sign them off, and when they should be paid.
- Reduce the risk of fraud or theft by clearly defining which employees have access to account information and how often those employees should review relevant documents for accuracy before being paid out by an outside source (such as a credit card company).
Your accounts payable policy should be reviewed and updated regularly to keep it relevant. The first thing you need before creating your accounts payable policy is a clear idea of what types of invoices are being paid by whom, when they need to be processed, and how often they will come due. This will help ensure that all employees know exactly what their responsibilities are regarding this aspect of business operations.
Next, implement software to streamline your AP process
If you’re a business owner, you may have noticed that your AP process is way more complicated than it needs to be. That’s because, while traditional software tools can help streamline the process, they also come with their own set of limitations—including poor functionality and exorbitant subscription fees.
But if you start looking around for better solutions, here are some key benefits that might catch your eye:
- Software can help you save time and money by automating countless manual processes that otherwise would take up hours in staff time every day.
- It can also help you get paid faster by enabling your vendors to submit invoices electronically via email or web portal instead of sending paper checks through snail mail (which takes even more time).
- It helps avoid legal issues by ensuring all transactions are recorded accurately and securely so there are no mistakes made in recording payments made between parties involved (which could lead them into legal trouble down the road).
One last benefit of implementing AP software is that it can help you avoid tax issues. If your business is not properly recording transactions, then it may end up owing money to the IRS (or other government entities) when tax time comes around. AP software makes this process much easier because no matter how many invoices get paid off in one month or how many checks come in during another. As a result, all expenses are automatically recorded and updated accordingly, so there are no surprises later on.
Create a supplier database
A crucial step to managing your transactions efficiently is to create a supplier database that contains all relevant information about your vendors. This will help you manage your vendors more effectively, avoid duplicate payments and keep track of the items you purchase from each vendor.
Here’s how:
- Create a spreadsheet in Excel or Google Drive with each vendor’s name listed down one side with columns including items purchased (such as paper), date purchased (if applicable), the amount paid, and any other notes related to the transaction (such as tracking number). If there are multiple people responsible for purchasing certain items from different suppliers, then list those employees’ names along with their email addresses. This way, they can receive notifications when something needs attention.
- As soon as you receive an invoice from one of your suppliers, enter this information into the spreadsheet. This will ensure that all purchases made by anyone within the organization are documented in one place.
Organize and digitize invoices
Another step in the accounts payable process is to organize and digitize your invoices. It’s worth mentioning that this is a repetitive process, so it might be something you want to automate with AP software. That way, you don’t have to do the same tedious steps over and over again. Here are some tips for organizing:
- Organize by vendor name or invoice number
- Create a spreadsheet or database where you can store all of your invoices in one place
- If possible, send emails directly from the invoice itself once it arrives at its destination (this isn’t always possible; it depends on what kind of accounting software you’re using). This will make it easier for authorized personnel who need access because they’ll receive notifications immediately rather than having them wait until they get home at night before checking their inboxes! Another option would be setting up alerts within your account management system, so anyone who needs approval knows right away when an email comes through or gets an alert text message.
Develop a system of controls
Once you have a basic understanding of how accounts payable works, it’s time to figure out how to make sure that the process is performing as intended.
The first step in this process is developing a system of controls. These are designed to ensure that your employees are using the correct procedures and safeguards when processing invoices, payments, and other documents related to accounts payable. These controls can include:
- Standardized practices: For example, each employee may be required to follow a certain workflow so that all invoices have been approved before payment can be issued (this could involve different teams or departments). Once the standard workflow has been established, it should be written down so that everyone knows what they need to do their job correctly.
- Internal audits: You can also hire someone within your organization to oversee transactions between vendors and your company—for example, someone from finance might fill this role by auditing invoices as they come through from vendors every month. This will ensure there’s no fraud happening within these transactions (e.g., where one invoice does not match another).
- Risk assessment tools: There’s software available in the market which helps assess risks associated with different types of business models. If yours involves handling cash flow from vendors, then it might be worth investing in some such software. This way, you’ll know how much money you need at any given time–and whether there are ways for fraudsters trying to steal some of those funds.
The 3-2-1 rule
The 3-2-1 rule is a fundamental principle of accounts payable and one that you should always keep in mind.
- Three days: An invoice should be paid within three days of receiving it unless there is a valid reason for extending the payment date. In such cases, speak with the vendor before doing so; they’ll appreciate being kept in the loop.
- Two days: An invoice received by mail or fax must be paid within two days of receipt—unless there is a valid reason for extending this time period as well. The same goes for faxed invoices; send them out as soon as possible and make sure they arrive at their destination on time (or even early).
- One day: After reviewing an invoice and ensuring that it’s accurate, sign off on it immediately and pay according to company policy or procedure (e.g., via check or wire transfer).
If you can’t keep up with these requirements, consult your accountant or financial advisor on how to best manage your accounts payable process so that it’s as efficient as possible. They’ll likely recommend using software instead of manually processing every document. Manually processing documents is inefficient—it takes up time and energy that could be spent doing other important things.
Double-check everything before you pay the vendor
Now that you’ve got the invoice and all the other documents necessary to make a payment, it’s time to double-check everything. Here are some things to check:
- The invoice. Check for any errors on the part of your vendors or your company, like transposed numbers or incorrect spelling.
- The vendor. Make sure this is indeed the right vendor and that they haven’t sent you any duplicates or additional invoices in error (which can happen). If there’s a mistake with their information, ask them to resend an updated version of their invoice before making payment.
- Amounts due. Make sure each line item listed corresponds to its corresponding document—for example, make sure there are no credits offsetting payments where they shouldn’t be (such as when products come in underweight). If there are problems here, ask your vendor to correct them so that you know exactly what amount is owed by either party at all times as per the original contract/agreement between the parties involved (e.,g., purchase order).
Follow up on outstanding balances
Once your payments have been made, you want to make sure that the business owners don’t forget about their outstanding invoices. If a payment is made, send a reminder email or letter to remind them of the outstanding balance. Also, try following up with a phone call as well. You can even go as far as sending them an automated reminder email or text message for every remaining day that their invoice is due.
If you are unable to collect from the customer (because they are no longer in business), then it’s time for you to take action and start writing off those bad debts on your books.
If you have a small business, then chances are that you’re not going to have time to manually follow up on outstanding invoices. It becomes much easier when you have an automated system in place.
Of course, the best way to ensure that payments are made on time is to invoice quickly. If you have a large business, then this can be a challenge because there might be so many invoices coming in at different times. You can take advantage of AP software to help streamline the process and make sure that every invoice gets paid.
You can ensure you’re paying your vendors on time by streamlining your accounts payable process
As a business owner, you want to make sure you’re paying your vendors on time. This is important because it keeps your relationship strong with them, and good vendor relationships are essential in maintaining a healthy balance sheet.
In order to ensure that this happens, you need to streamline the accounts payable process—and there are several ways you can do so:
- Create an excellent accounts payable policy for your company (or take one from another company that has a proven track record) and review it with staff at every meeting. If someone doesn’t understand something in the policy or feels uncomfortable following it, they should bring it up immediately. This way, everyone will be aware of any issues before they become serious problems down the line.
- Ensure that all employees are familiar with good software practices—in particular, those related to data entry and data validation—and provide training where necessary. Thus, everyone will know how things should be done properly before entering information into any system used within accounting systems.
Conclusion
Your business and your vendors depend on you to pay their bills. You would not want to lose the customers and suppliers who trust you with their business, so it’s important that your accounts payable process is efficient and effective. There are many pieces to the puzzle when it comes to keeping up with the payments owed by clients or vendors, but we hope this article has given you some helpful insight into what those are.
The key takeaway here? Don’t be afraid of keeping track of your bills—it just takes a bit of organization (and maybe an app)! Remember that if something goes wrong, there are ways for you personally as well as for your company as a whole to avoid getting stuck with late fees or penalties from creditors who need payment before they can move forward with other projects. And don’t forget: If all else fails and you find yourself in financial trouble due to unpaid invoices, there are various options available depending on how much money needs repaying as soon as possible.