An overdue invoice is no administrative hassle for a supplier. It can lead to a potential delay in getting the product to market, reduce negotiating power, and create an added load on another entrepreneur who is trying to get the product out the door, hire employees, and handle cash flow. Having a good understanding of how to manage accounts payable allows a business to have control over when money comes out of the bank, why money is being paid, and whether the payment is supported correctly.
In growing businesses, accounts payable not only means a list of bills to be paid. It’s a continuous task that is composed of purchasing, supplier management, bookkeeping, and cash planning. This practical accounts payable guide for SMEs outlines how to set up payment processes and pay legitimate suppliers on time.
How to manage accounts payable with clear ownership
The first is ownership. At least one employee in any small business should be assigned to accepting the invoices, ensuring they have all the necessary details, speeding up the documentation process, and getting them ready for approval. This does not indicate that the person should approve all the payments. This is a sensible control, especially with the growing amounts of payment values and transactions.
Describe a written process you could have them in your group follow. It should outline the locations of the invoices to suppliers. Who reviews the invoices, who approves the spending, when the spending is made and when the invoices are paid, and where supporting records are stored. What could be stored in one employee’s brain is a potential health risk if that employee is absent, on vacation or unavailable.
Clear approval limits are also beneficial. A director may approve a contract of any size, but some members of the team may be authorized to approve regular operating expenses up to the amount agreed upon. The right level depends on the volume of the business, their resources of cash and nature of their purchases. The aim is not to put in place any bottlenecks but to provide for the adequate review of expenditure.
Capture invoices promptly and consistently
Invoices should be sent to a specific business email account or via a stipulated system instead of personal inboxes, messaging apps, & paper. This provides the business with one reliable entry point and decreases the chances of a bill being overlooked.
After receipt of an invoice, check the name of the supplier, invoice number, the date, the payment terms, the bank information, the currency, the tax and the total. It should also be evident from the title what goods and/or services were provided (and from what business area). Correct the problem if any important information is missing, before the due date of the invoice.
Make sure that approved invoices are recorded as soon as possible, not at the end of the month. Early entry gives more accurate data on the liabilities and cash available. It also improves the management’s forecasting of future reservations that might become critical. It is especially crucial for businesses that have a regular trading relationship with overseas suppliers to consistently record the original currency as well as the exchange rate policy.
Retain the original invoice, purchase order (if applicable), delivery confirmation, and approval record. Digital storage should be more convenient than keeping documents on paper, unless the documents are not stored in a consistent folder system and cannot be easily retrieved. Good records can aid in reliable bookkeeping and, in the event that evidence is required months later, less time is wasted searching.
Match bills to what was ordered and received
While a business doesn’t always require an extensive purchasing department, it does require a means of validating that it’s paying for a legitimate and official expenditure. This is frequently done for goods by comparing the supplier’s invoice with the purchase order and by obtaining a receipt of the goods. In the case of services, the same manager who was engaged to carry out the services should ensure that the work was done to the satisfaction of the client.
If there are multiple users placing orders, stock levels are changing, and/or the invoices are recurring, it is helpful. Identify duplicate billing, pricing errors, delivery charges that are outside the “wild” and unused subscriptions. If the business does not have a formal purchase order, an approved written request or documented management approval would be helpful if you’re purchasing something smaller.
There’s a balance to be struck. It’s not efficient for the business to have to look at multiple checks for every low-dollar, routine bill. A good approach is to accelerate payments for high-value transactions, existing regular payments, payments to new suppliers, atypical payments, and changes to a supplier’s bank account, and to slow down payments to existing regular suppliers.
Plan payments around due dates and cash flow
A good accounts payable process is not the automatic payment of bills upon receipt of an invoice. An early payment might result in unnecessarily high working capital requirements. Late payment may result in penalties, interruption to supplies, and loss of supplier credibility. The right way is to have a payment schedule that has been agreed upon and aligns with the company’s ongoing cash flow estimation.
Check out upcoming payments every week. Make sure all invoices are paid in order of priority and type of payment; collect all invoices in the following order: by supplier, payroll commitments and other critical outgoings; match all invoices to receipts. If money is tight, act now! Speak to the supplier about the problem; don’t go personal; suggest where possible.
Treat all payables differently. The value of a landlord, the critical software provider, and key stock supplier could be more vital to your operation than a non-essential discretionary item. Meanwhile, do not let a preference take the place of a written priority. A uniform policy provides an aid to the directors’ decision-making where there are limited funds.
Saving through early payment discounts may be advantageous, but only if the benefit of the discount is greater than the value of keeping the cash. Likewise, extended payment periods can improve cash flow, but if they are extended, they must be agreed on fairly and adhered to. As well as timely payment, good supplier relationships are established with good communication.
Protect payment controls and supplier data
Payment fraud is often initiated by a seemingly innocuous email requesting a change in payment information. Assume any change of supplier payment details to be high risk. Check it with a known telephone number or previously known contact, NOT the number or link in the request itself. Note who verified and the date verified.
No person should be able to release a payment without a second person entering a payment. Dual authorisation is a wise measure to protect bank payments, especially for larger amounts. Also, access to accounting software and online banking should only be granted when necessary, and checked if there are changes in roles.
Regularly revise the supplier master list. Remove duplicate records, contacts that are not active, and contacts that are out of date. Be aware of bank names that are the same, duplicate bank accounts, and unusual payment methods. This basic housekeeping will make it apparent that they’re making mistakes before any cash leaves the business.
Reconcile accounts payable regularly
Reconcile accounts payable ledger with supplier statements & general ledger at the end of the month. Its purpose is to detect unpaid invoices, payments made but not assigned, supplier credits, duplicate payments, and disputed balances. These are issues that are more difficult and expensive to solve at the end of the year.
Aged payables reports are useful for the directors. They illustrate the present, the future, and the past. They’re combined with a cash flow forecast and provide a realistic outlook of short-term responsibilities, not simply the bank balance.
If statements from the suppliers don’t match what is in your records, check it out right away. This may be due to a delay, or perhaps a credit note or an invoice has not been entered or sent to the incorrect email address. The sooner the discrepancies are resolved, the sooner accuracy is achieved, and the business relationship is protected.
Use systems that fit the business
A small business with not many monthly invoices might be good enough for a spreadsheet, but a lot of discipline is required with this. The more invoices there are, the more accounting software can provide visibility on the due dates, the approval status, the payment history or the supplier balance. Not the most elaborate is not the best system. It’s the one used every day by your staff, recording consistent documents for management.
If the business already has accounting software like TallyPrime or any other. It is recommended to think about supplier entries, terms of payment, approval workflow and reporting categories during the initial stage. Confusion can arise due to a poorly structured system even if it is working properly. Continuous bookkeeping assistance can ensure the consistency of transactions and provide management reports that are correct in position.
An outsourcing of the day-to-day administration can also be very practical if the business doesn’t require a full-time finance team. What is most important is having the internal approval authority without giving up the confidence of the provider in the processing of invoices, record-keeping, payment scheduling, and reporting. This allows founders to have control over the documents without having to do them themselves.
The best approach to the management of accounts payable is to treat it as a routine management function instead of as a “payments” chore. Businesses that are successful can help ensure cash flow security and prove to be reliable and trustworthy when dealing with suppliers by clearly showing ownership, accurate records, and sensible controls.
FAQs
1. What is accounts payable management?
Accounts Payable Management is the timely. And accurate recording, review and payment of supplier invoices.
2. Why is accounts payable management important for SMEs?
It streamline cash flow and helps companies to avoid late payment fees. Minimises mistakes and offers them great partnerships with suppliers.
3. How can a small business avoid delays in accounts payable?
If there’s a clear way to get something approved, then if there’s a small business with a clear, easy-to-follow process for getting it approved, it is not as slow to record an invoice, it knows exactly when to expect the bill to be paid, and it regularly reviews outstanding bills without delay.
4. How often should a business reconcile accounts payable?
To ensure that unpaid invoices, duplicate payments, missing payments, and supplier account imbalances are not occurring, there should be periodic account reconciliation, ideally monthly.
5. Can outsourcing accounts payable help small businesses?
Yes. Small businesses can gain several benefits from outsourcing AP.AP outsourcing can be a good solution for small businesses to cut down on administrative tasks, enhance invoice processing, keep accurate records, and streamline payment management.
