Are you a small business owner looking for some practical business-boosting tips? Most small businesses face unique sets of challenges, and managing accounts payable is no exception. We’re here to help.
What is accounts payable? Accounts payable (also referred to as AP) is the total amount of short-term debt your business owes to creditors, vendors, and suppliers for services or goods you purchased but have not yet paid for.
Why is managing AP so important?
Businesses cannot function without paying their operational costs. Properly managing the money going out of your business is important for:
- Improving cash flow health
- Keeping strong relationships with vendors
- Saving time and boosting efficiency
- Maintaining a good business reputation
Accounts payable (AP) management is essential for keeping cash flow in check and keeping your business in good financial health. This article gives you some business-savvy tips to streamline your accounts payable process, so you can focus more on the things you actually enjoy—like running your business.
1. Start automating
Checks and other manual AP processes can be messy and likely can lead to human error. However, many businesses still use these outdated methods to handle all their payments. Some business owners believe doing things manually is cost-effective, while others may feel the manual processes give them more control. And others are paying with checks because their vendors simply don’t accept other forms of payment. Switching to an online accounts payable tool like Melio is a game changer:
- Save valuable time wasted on manual work so you can focus on maximizing revenue.
- Automate recurring payments such as rent and utilities so you never have to worry about missing another payment.
- Minimize human error, such as typos, that can be costly and time-consuming to correct.
- Track every payment from one centralized place so you never miss a bill payment.
- Save money on physical items (such as checks, envelopes, and printer ink) bank fees, and services including postage and delivery.
- Be more eco-friendly and reduce your carbon footprint by going paperless.
2. Centralize your payments
Try to use a single central bank account for all your business bill payments. This will make it easier to keep track of all your payments and ensure you file them correctly in your books. Don’t mix your personal and business finances as this can affect your liability, taxes, and credit scores. Cloud-based AP solutions offer the added advantage of accessibility from anywhere and everything all at once—allowing you to stay on top of your finances even when you’re on the go.
3. Set clear approval workflows
It’s important to have oversight and control over the money coming out of your business account. By clearly identifying who should review and approve payments, businesses can ensure accurate review and approval from all relevant stakeholders, avoiding delays. This means a set of rules determining who in the organization can send payments and which transactions require approval from higher-ups.
For example, you can decide that certain members of your team are allowed to send payments under $1000 without additional approval while others need to get approval for transactions as low as $150. You should also decide who needs to approve each payment, whether it’s the CEO or a manager. You can easily set up approval workflows with the right automated accounting tools.
4. Keep vendor relationships strong:
Establishing good relationships with your vendors is crucial, and one way to achieve this is through negotiation. Don’t be afraid to discuss payment terms that align with your cash flow. Better payment terms give you more flexibility, making it easier to handle your AP. But, you’ll need to be proactive, since most vendors won’t volunteer to improve existing terms unless they are asked.
Take the initiative and reach out to your vendors to:
- Ask for more time. Instead of net-30, ask if they can live with a net-60 or 90 arrangement.
- Request bulk concessions when possible. If you’re a big customer or are able to accommodate large stocks of nonperishables, your vendor may be able to give you a special price.
- Don’t forget to check about early bird discounts. If you’re able to pay them early, this could mean a lot to your vendors and help with their cash flow. They may even in turn reward you for it with exclusive deals.
5. File invoices right away and prioritize them by the due date
Make sure to file any invoice you receive right away so it doesn’t slip through the cracks. That could mean sending it over to the person responsible for approving payments or adding it to the workflow for the next payment date yourself—but don’t just toss it aside for later. That way you can avoid dealing with any missed payments or angry vendors.
Prioritize invoices by their due dates. If one vendor sends you a net-15 agreement and another gives you net-30, take the time as an advantage to pay off both on time. Why? Paying both invoices when they come in could put a strain on your cash flow. With net terms you can hold on to your cash longer. This can be done a lot easier when using a digital tool.
Understanding the key components of AP management is an important step to maintaining financial health. To sum it all up, take advantage of automation, stay organized, negotiate vendor terms, implement an approval process, and regularly reconcile your accounts.