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Accounts payable is an accounting term that refers to the liabilities your business owes suppliers and vendors. All debts and bills other than payroll fall under this category. Understanding your accounts payable and developing the cash flow to support it, then, is critical for any business’s financial health. Below, we will delve into the accounts payable process and provide tips on how to manage it effectively to support the growth and longevity of your business.
Accounts payable is important to a business for a number of reasons. It can impact cash flow and business credit score. Moreover, tracking accounts payable over time can help you better understand your expenses and how they’ve grown along with your business. Of course, this insight is only available when you’ve kept adequate records of your expenses over the years.
“The accuracy and completeness of a company’s financial statements are dependent on the accounts payable process,” said Harold Averkamp, founder and content author of the accounting advice website AccountingCoach.com. “The efficiency and effectiveness of the accounts payable process will also affect the company’s cash position, credit rating and relationship with its suppliers.”
The key steps of the accounts payable process include:
While accounts payable represents the money you owe vendors and suppliers, accounts receivable indicates how much cash you’re awaiting from unpaid invoices, which is crucial for your business’s cash flow.
Many small businesses supervise accounts payable, often abbreviated as A/P, on a monthly basis. However, as a business expands, monitoring accounts payable weekly is recommended. The augmented frequency aids small businesses in capitalizing on any early-payment discounts included on invoices and settling credits owing to inventory returns.
Below are some best practices for supervising accounts payable and ensuring your business’s finances operate smoothly:
Cash flow is critical to a small business. A robust system of= managing accounts payable provides you with a transparent picture of your expenditures against your revenue, enabling better business decisions.
Some people are initially confused about accounts payable versus accounts receivable. While accounts receivable is money others will pay you, accounts payable represents what you owe your vendors.
Accounts payable encompasses all B2B billing, in which your company is obligated to pay another company for the goods or services it provides. Here are some examples of accounts payable scenarios:
Hire a small business accountant who can recognize red flags in your accounts payable process and streamline your business finances.
If you want to learn more about why accounting is important to your business, further information on handling accounts payable can be found in the following articles:
Adam Uzialko also contributed to this article.