Don’t count the accounts payable aging report out. In these uncertain times, this oft-overlooked accounting method can alert you to cash flow problems and protect your bottom line.
Most small business owners worry about their cash going in and cash going out, giving little thought to how much they pay over time. It’s a popular way to operate, but it’s also a surefire way to run into cash flow problems if an unexpected bill comes due. A more effective way to run your business and protect your cash flow is through the accounts payable aging report.
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“Cash coming in and coming out does not tell you the full story you need to manage your accounts,” Ben Richmond, country manager at Xero, told Business News Daily. “Managing accounts payable is an important part of managing cash flow.”
Accounts payable, otherwise known as AP, represent the money you spend to operate your business. They typically go to pay vendors and suppliers weekly, monthly, quarterly or annually. An accounts payable aging summary report improves billing by laying out when payments are due, how much your balance is, and whether you can save money by paying early or protect your cash flow by paying later.
“It tells you how much you need in order to satisfy your debt obligations,” said Dawn Brolin, a certified public accountant and owner of Powerful Accounting. “It helps with forecasting to make sure you can stay in business.”
Many small business owners only focus on cash coming in and cash coming out, which doesn’t give them the full picture. The accounts payable aging report provides a broader view of your cash flow over time.
Most top accounting software solutions can create accounts payable aging reports. An accounts payable aging report can be as unique as the business creating it, but the following categories are found in most:
The idea is to give you a visual aid to assess your outstanding debts and flag the ones that are late. The report is typically organized in 30-day groups so you can easily see what is due in the current month and future periods. It can be customized to include vendors who may have one-week or two-week due dates. If done right, the AP aging report should quickly show you what is coming due.
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Small business owners may not think the accounts payable aging report is important. After all, who has time to pay bills, let alone track what is owed a few months from now? But don’t overlook the benefits of this accounting tool.
Cash is the fuel that keeps businesses running, yet managing it can be one of the most difficult aspects of running an enterprise. An accounts aging report can help. You’ll know when bills are coming due, so you can pay on time to avoid any penalties or pay earlier to get a discount from the vendor. It avoids surprises that can hurt your cash flow and your bottom line.
You’ll also avoid damaging your business’s reputation. If you consistently pay late, vendors may not be willing to extend you credit or, worse, will balk at doing business with you in the future. That impacts cash flow and your business’s ability to thrive.
“You want to build relationships with suppliers,” Richmond said. “Often, for those who are paying late without notice or without any conversation, suppliers tighten the terms of trade.”
Cash is what fuels small businesses, so managing it is a top priority. Cash in and cash out is important, but it only tells half the story. An accounts payable aging report gives you the complete picture.
Another benefit of the accounts payable aging report is a better understanding of your vendors and suppliers. That may not be as important to a large national company with a lot of buying power, but for small businesses, it can be vital. Through the aging report, you can identify vendors who will give you breaks if you pay early, those who don’t mind if you are late, and the ones who are willing to negotiate better terms.
The accounts payable aging report can also help you prioritize bills. Not all vendors send out invoices on a 30-day basis. With an accounts payable aging report, you can categorize your bills based on due dates, prioritizing the ones that need to be paid first.
It also makes budgeting easier, as you will have access to historical data on your spending and debt. You’ll be able to determine if you are relying too much on credit, or you might pinpoint an opportunity to negotiate more favorable terms. None of this is possible without the accounts payable aging report.
“It’s a really useful tool when paying 30 days or longer,” Richmond said. “It helps you make sure you don’t miss paying someone on the agreed-upon date.”
An accounts payable aging report can help you manage your cash flow, budget, and negotiate better terms with vendors. It can also help you prioritize which bills to pay first and prevent you from incurring any late fees.
One of the reasons small businesses overlook the accounts payable aging report is that it can be time-consuming to create and takes effort to track and update. Instead of doing all that manually, enlist accounting software to automate the process.
“The bulk of small business owners seem to be doing it manually, getting invoices and entering them manually,” Brolin said. “To me, that is an archaic way to do business. There are third-party apps they can use to facilitate this.”
Several free and low-cost applications will handle the accounts payable aging report for you. They can capture invoices, organize them based on due dates, and alert you when bills are coming due or are past due. These apps also integrate with accounting software like QuickBooks, enabling you to run historical reports on your vendors, suppliers, costs and payments history.
“It saves time and human error,” Brolin said. “If you’re not paying attention to the terms, it can be a big issue.”
If you track AP aging manually, Brolin said, you can’t simply enter the accounts payable information. You need to make sure you understand the invoice. You don’t want to leave payment discounts on the table or get hit with a late charge you weren’t aware of.
“Looking at the terms and date on invoices isn’t enough,” Brolin said.
Modern accounting software can automate your AP aging report. You can easily upload invoices, customize fields and set alerts when bills come due. It can integrate with your other financial data to give you a comprehensive view of your cash flow now and in the future.
There is no one way to create an accounts payable aging report, although it’s always important to include all the necessary information. With that in mind, here’s an example of an AP aging report from QuickBooks.
Accounts payable aging reports and accounts receivable aging reports are similar in that they give you a visual of what is due now and what is coming due. The only difference is that the accounts payable aging report focuses on what you owe and the accounts receivable aging report is concerned with what is owed to you. The report should include details about the amount owed, when it is due, how late the payment is, and what discounts you are offering for a faster payment.
To effectively manage your cash flow, don’t forget about the accounts payable aging report. It’s an added step, but it can help you prioritize your bills, budget and forecast, and keep your operations humming along.