How to handle accounts payable for small businesses

Posted on September 1, 2022

Cash flow is particularly important to small businesses and startups. An accurate and reliable system of monitoring accounts payable gives you a clear picture of your income and expenditure, enabling better business decisions to be made.

Accounts payable includes all of your company’s expenses, except for the payroll. This is why it’s important for SMEs to handle this vital component of your business’s finances efficiently.

What does accounts payable mean?

Accounts payable describes the bills that a business has to pay. Everything bar payroll falls under this category, making it a critical aspect of your business. As a new business, you may have to purchase items such as staff uniforms, office supplies, or cleaning services for your premises.

There are three basic steps to accounts payable: purchasing the goods or services, receiving your order, and paying your supplier. Once your business starts getting established, there will be ongoing regular expenses that will be dealt with by accounts payable.

The accuracy and completeness of any business’s financial statements depend on the accounts payable process. It will affect the business’s credit rating, cash position, and ongoing relationship with its suppliers.

This is why SMEs need to implement a dependable accounts payable system to produce the accurate financial information required to plan for the future. Putting it simply, without an accurate accounts payable system, your business could end up in trouble if you don’t keep up to date with your debts to suppliers.

What are some examples of accounts payable?

An example of accounts payable is cleaning services when your company hires an outside company to handle the cleaning of your business premises. This will be a regular service, so you will need to budget for the payments in your income and expenditure data. Sending regular payments to the vendor assures prompt and reliable service.

Staff uniforms are another example of accounts payable. If you commission another company to create your staff uniforms, this process can be set up through accounts payable. While there will be a one-off payment if you’re a new business, there will also be ongoing invoices when you hire a new employee or need to replace existing uniforms because they are becoming damaged with wear.

Office supplies are another key example of what accounts payable handles. Again, there will be a one-off purchase if you are a new startup or small business, with ongoing expenses for further office supplies on a regular basis.

Many companies buy office supplies in bulk to ensure they are never in a situation where they are running out of supplies. Buying in bulk can also help keep costs down. Accounts payable enables you to have automatic orders set up on your account. Base them on the average frequency when the vendors are used.

Finally, many businesses pay to have their waste and recyclable materials hauled away. These services are usually weekly and can also be budgeted into accounts payable.

Using accounts payable efficiently means all bills will be paid on time, you will have an effective system of query management in place and you will not end up in a situation where bills haven’t been paid and your credit is limited due to debts.

All of this is particularly important to a new business, as your reputation and creditworthiness are crucial to ensure you can purchase the supplies and services you need to keep your company afloat.

How do you track accounts payable?

Tracking accounts payable is something many small businesses do on a monthly basis. As the business grows, it’s commonplace to track finances on a weekly basis.

It is preferable to make it a weekly task to benefit from early payment discounts. Also, it’s easier to resolve any credits promptly as a result of inventory returns. Businesses should always keep a record of accounts payable in case there are any disputes over payments.

An automated accounts payable system is the preferred choice of many businesses. It utilises staff resources more efficiently when employees don’t have to input the data manually. In addition, an automated AP system can be more accurate, as it cuts out the risk of human error.

Tracking AP weekly reminds businesses of current and outstanding invoices. It also provides proof of expenditure when it’s time to complete your tax returns. You can keep the records manually or with the latest automated software.

Is accounts payable complicated?

While working with accounts payable requires attention to detail, it need not be a complicated process. Invoices should be checked and verified for accuracy and the billing date and payment date should be confirmed. If you carry out accounts payable manually, the figures must be entered accurately in the ledger.

If you use software, often it has the capability of uploading an invoice by scanning it, minimising the risks of entering incorrect data. As a new business, setting up your accounts payable and ensuring the process runs smoothly is the key to running your business efficiently.

You should always work from the original invoice when possible. For those that have been sent electronically, it is still necessary to check them for mistakes before you upload them onto your system. Some businesses print an email to keep in a physical filing system and then store the email in the relevant online folder too.

While each vendor will have its own system of invoicing, you should always assign the invoice number in your system in a consistent manner. Determine the method you’re going to use and stick to it to avoid confusion later.

Enter each invoice individually, including inputting multiple monthly invoices from every supplier separately. There are no shortcuts when it comes to invoices. When you do it properly, you will be able to track down one invoice quickly and easily in the event of a dispute.

Have an appropriate person check and approve each invoice before they are uploaded onto the accounts payable system. Ideally, the person who approves the invoices should be separate from the person who enters the data onto the system. If one person does both tasks, there is greater scope for error.

If you’re a sole trader and you do your own bookkeeping, this may not be possible. You need to have either a clear process for approval and data entry or employ the services of an accountant on a part-time (or “as and when needed” to double-check the figures).

As a small business, if you typically work with accounts payable only once a month, utilise a system whereby you identify early payment discounts as soon as each invoice is received. Don’t just put all invoices in a monthly pile – read them thoroughly to avoid missing out.

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