One of the questions we are often asked by our clients is: what are accounts payable, and why do you need to manage them?
If your business purchases goods or services and doesn’t pay for them upfront, you will receive an invoice from the supplier. These are your accounts payable, i.e. the bills you owe. They can be anything from your stock or equipment purchases to your fuel card to your monthly mobile phone plan. A payable is an invoice you need to pay: therefore a short-term liability.
So far so good, but why do you need to manage your accounts payable? Can’t you just pay your bills each month? Well, it’s all part of having better control and management of your business’ finances. Knowing your accounts payable helps you to determine if you are profitable. Recording expenses when you incur them, i.e. when you receive an invoice, gives you an accurate picture of your profitability and cash flow position and helps you make better decisions.
Accounts payable aging reports are easily generated in most accounting software packages. They show you who you owe, the amounts due, and how old the invoice is (such as current or past due by x days). If you don’t use accounting software, you can set up a simple spreadsheet to track this data.
We recommend regularly tracking your bills and monitoring your accounts payable aging report to:
- Ensure you can pay your bills on time to maintain good supplier relationships and credit history
- Prioritise bills where necessary to avoid penalties and interest
- Take advantage of discount opportunities such as early payment discounts
- Take action if you know you will not be able to make a payment on time, such as contacting the supplier and requesting to pay off the bill in instalments
- Plan for larger purchases
If you have questions regarding your accounts payable or any other aspects of your financial accounts please contact us – we are here to help.