Your web browser is out of date. Update your browser for more security, speed and the best experience on this site.

Update your browser

Finance Forward Blog

Accounts Payable 101 for Small Business Owners

Accounts Payable 101

As a small business owner, effectively managing your accounts payable is an important aspect of maintaining the financial health of your company. While cash flow can be tight, especially in the early stages, implementing some best practices will help you stay on top of bills and payments. This allows you to avoid issues like late fees, strained vendor relationships, and unnecessary interest charges. Here are some tips for efficiently handling what your business owes to suppliers and creditors.

Understanding Accounts Payable

First, accounts payable, commonly abbreviated as AP, represents the money a company owes to vendors and suppliers for goods or services received on credit. Any unpaid invoices from vendors are considered liabilities on the company's balance sheet until they are fully paid off. Accounts payable is essentially a form of short-term debt that requires careful monitoring and processing.

The accounts payable function encompasses a range of activities, including:

  • Receiving and verifying the accuracy of vendor invoices/bills

  • Obtaining proper approvals for payment

  • Scheduling and remitting payments to vendors based on terms

  • Recording AP transactions in the accounting system

  • Resolving any discrepancies or overcharges with vendors

  • Maintaining complete payables records for reporting purposes

Properly managing the AP process is critical for several reasons, such as:

  • Ensuring bills are paid on time to avoid late fees and damaging vendor relationships

  • Taking advantage of early payment discounts when cash flow allows to reduce costs

  • Keeping accurate financial records and reporting AP liabilities correctly

  • Detecting errors, duplicate charges, or missing invoices before payment

With a clear understanding of what accounts payable entails, let's dive into best practice strategies for efficiently handling this key financial process.

Establish Clear Policies and Procedures

First and foremost, we recommend documenting your accounts payable policies and procedures in a manual that all relevant employees can reference. This should cover areas like:

  • Invoice receipt, coding, and approval processes

  • Payment authorization levels based on dollar amount

  • Vendor payment terms and any early payment discounts

  • Dispute resolution protocols

  • Month-end and year-end close processes

Having these guidelines formalized will bring consistency to how your AP function operates.

Leverage Accounting Software

It may also take a big burden off of your shoulders to invest in robust accounting software that allows you to easily record bills, schedule payments, track due dates and available discounts, and generate reports on outstanding payables. Many solutions today integrate with bank accounts for simplified payment processing.

The right software keeps your AP running smoothly and provides real-time visibility into your cash commitments, and is not as prone to errors as manual spreadsheet tracking.

Verify Receipt of Goods/Services

Before paying any invoices, a wise step is to ensure you actually received the goods or services billed and that the numbers are correct—you might be surprised how often our accounting team finds mistakes! Implement a process for the receiving department to sign off on delivery slips that get matched to the vendor invoice. This prevents paying for things you didn't get or overpaying.

Negotiate Payment Terms

You don’t necessarily have to accept the default payment terms vendors offer. Especially for larger or recurring payables, you may be able to negotiate an extra 7-30 days to increase your cash conversion cycle. The vendor may agree if it means securing your business.

Take Advantage of Discounts

Likewise, be sure to seize any opportunities for discounts by paying invoices early when it makes financial sense. A discount of 2% if paid in 10 days rather than the typical 30 could be worthwhile if it exceeds the opportunity cost of those funds over 20 days.

Prioritize and Schedule Payments

When cash is tight, prioritize which invoices get paid based on criteria like:

  • Keeping mission-critical goods/services flowing

  • Avoiding late fees or service disruptions

  • Capturing any early payment discounts

  • Maintaining strong vendor relationships

Monitor and Measure Performance

Finally, track key performance indicators like:

  • Days Payable Outstanding

  • Discounts Captured vs. Missed

  • Percentage of Invoices Paid On-Time

  • Process Efficiency Metrics

Reviewing these metrics regularly allows you to identify issues and continually improve your AP management.

By following AP best practices like these, your small business can optimize cash outflows, preserve cash longer, and maintain positive working capital to fund growth initiatives. If you need help with any aspect of your small business accounting, we’d love to hear from you! Schedule a free consultation call today.