Understanding How Accounts Payable Affects Your Business

Having constant cash flow ensures operational efficiency, in which accounts payable plays a significant role in building a company’s credibility and success.

If running a growing business is your top priority then finer details around accounts may not be your core focus. Yet it is a very important part of any successful business. If you’re unsure whether your accounts payable are being handled efficiently, our team of Outsourced Accountants can help. We can help you manage the tedious tasks you’re ready to hand over.

Understanding How Accounts Payable Affects Your Business

Having constant cash flow ensures operational efficiency, in which accounts payable (AP) plays a significant role in building a company’s credibility and success. For understanding, an apprehensible accounts payable definition is money owed to suppliers for goods or services on trade credit. In business law, it is a short-term debt your company may owe for products received or a separate business department of accounting.

Some accounts payable examples include bulk office supplies purchased on a trade credit with a vendor, weekly services along with the likes of sanitation services, etc. Suppose your business falls behind on monthly payments because you have insufficient cash flow, it will affect your credibility. Suppliers, creditors, and even investors will consider non-payments as delinquent which may affect your credibility in the analysis process. Evaluating your financial position is essential for investors and creditors when considering investing or opening a line of credit.

While paying your bills is an account payable process, it is also a financing source with incentives if offered by your suppliers. If your company is not paying its bills promptly, you become a risk, and a supplier may stop extending credit to allow you to purchase products and services. Keeping payments current has the benefit of potentially building a successful business and attracting investors when you want to expand. Learn the impact accounts payable has on your business and why an accounts payable manager can be key to improving cash flow within your business and maintaining healthy vendor relationships.

Risks Associated with Accounts Payable

  • Payment duplication is common in accounts payable and can go undetected without the expertise of an AP manager who analyzes and verifies transactions.
  • Erroneous or misdirected payments may be paid to the wrong vendor when a business doesn’t have adequate accounts payable processes in place.
  • Inflated payment amounts could slip through on invoices due to internal fraud should the unfortunate event occur in which an employee deceptively works with vendors.
  • Fraudulent accounts payable and disbursements would be seen as misappropriations of the company’s assets, whether by an internal employee or management.

Benefits of an Efficient Accounts Payable System

  • A good accounts payable system encourages prompt payments and responses to customers’ inquiries. This encourages creditworthiness and maintains good working relationships with vendors.
  • A healthy accounts payable system ensures the audit process runs smoothly when auditors request paid invoices from random vendors to detect inaccuracies.
  • Accurate accounts payable transactions lead to a cleaner accounting process.
  • A solid AP system creates constant cash flow within the business, and
  • Encourages fraud avoidance.

Accounts Payable vs Accounts Receivables

Although accounts payable is the money your company owes to vendors, accounts receivable (AR) is what customers owe to your company. Investors and lenders will use your AP and AR ledgers to help analyze your company’s financial position by reviewing cash flow, income, and the balance sheet statements. If you notice on the balance sheet, it does list your receivables, whereas accounts payable are not listed.

Handling the responsibilities of AP for a startup business is complex, especially in knowing is accounts payable a debit or credit. When an AP manager records AP transactions, the asset or expense account regarding the purchase is a debit. Once paying the accounts payable, the manager will debit AP and credit the cash account using accounting software, such as QuickBooks or NetSuite.

Business owners may not be aware that AP and AR can affect balance sheet entries and the account payable turnover ratio level. Measuring how quickly you make payments to vendors or creditors through trade credit is the accounts payable turnover ratio for calculations. To calculate the turnover ratio, the manager will need to determine the average AP by adding the opening and closing balances, then dividing the result by two.

The computation of the AP turnover ratio is the net credit purchases divided by the average accounts payable total. Investors and lenders may use ratios to determine your creditworthiness as part of the evaluation process before an investment or extending credit to you. If there is a high ratio, it could mean you make timely payments, but a low ratio may reveal untimely or delinquent payments.

Seven Best Accounts Payable Best Practices

1. Establish AP internal controls that will limit access to your accounting software and help identify inefficient processes.

2. Utilize paperless automated technology to eliminate excessive paper waste with manual invoicing.

3. Keep your suppliers’ information updated to make they receive payments on time.

4. Create safe protocols that will automatically detect payment duplication.

5. Invoices organization and prioritization for easily tracking payments scheduled for payment by the due dates.

6. Set up fraud detection in the accounts payable management system for flagging AP transactions.

7. Establish standard payment terms for each vendor account to optimize AP processing and control your cash flow.

What is an Accounts Payable Manager Responsible For?

An accounts payable manager’s job description comprises a variety of responsibilities, including tracking all your expenditures, payments, invoice statements, and purchase orders. Managing all AP activities, including prompt payments to your vendors, would form part of the duties of an accounts payable manager. Other responsibilities include verifying data and journal entries, comparing the AP management system reports, preparing accounts analysis, and producing monthly reports.

At Fusion CPA, our accounting professionals understand how AP affects your company, and are equipped to handle accounts payable transactions. We can help you create an efficient AP management system that would allow you to keep track of transactions to be able to easily detect fraud or suspicious billing and transactions. Outsourcing this service can help you reduce costs and ensure payment promptness to help keep your records accurate and up to date.

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This blog article is not intended to be the rendering of legal, accounting, tax advice or other professional services. Articles are based on current or proposed tax rules at the time they are written and older posts are not updated for tax rule changes. We expressly disclaim all liability in regard to actions taken or not taken based on the contents of this blog as well as the use or interpretation of this information. Information provided on this website is not all-inclusive and such information should not be relied upon as being all-inclusive.

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