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This article is for educational purposes and does not constitute legal or tax advice. For specific advice applicable to your business, please contact a professional.
Paying bills to suppliers or vendors is a fundamental part of regular business operations for companies. Finding the most time-efficient and cost-effective way to settle debts on time can positively impact your business finances and your ability to forecast future decisions.
For the business owners receiving and relying on those payments, they may offer incentives in exchange for consistency. According to a recent PYMNTS survey, on average, small business owners will offer a 4.1% discount in exchange for early payments. As the debtor in this partnership, here are a few best practices for making the most of your accounts payable.
Why accounts payable is important for business owners
Accounts payable is a critical part of your cash flow management. By paying vendors and bills on time, you can better manage your overall business finances. In fact, in a recent survey by PYMNTS and Routable, 98% of respondents say automated AP will improve their speed of managing payables. Respondents also largely placed speed of payments, visibility and transparency of those payments, and data security as top areas where AP automation could be impactful.
Not only can having a positive relationship with vendors and suppliers be beneficial for your business, but it can also help you track and manage your cash flow. Accounts payable departments and professionals play a critical role in preventing fraud by making sure payments are delivered to the correct supplier or vendor.
What is the difference between accounts payable and accounts receivable?
Accounts receivable is the money owed to a business by its debtors. Debtors in this case might refer to a customer. Accounts payable, on the other hand, is the money a business owes to its suppliers and vendors. Keeping track of your business’s accounts receivable and accounts payable can help you manage your cash flow. Accounts receivable are cash inflows, while accounts payable are cash outflows. Both of them will be reflected in your company’s balance sheet under assets and liabilities.
If you run a clothing store, for example, you may see accounts receivable in the form of sales that haven’t been paid yet, such as a large order that you haven’t received an payment on the invoice for. Accounts payable in this business could look like inventory purchases or marketing and advertising expenses for your business. They may also include any store repairs or shipping costs.
Strategies for managing accounts payable
If you get in the habit of paying often or even ahead of time, you will not only have better sightlines into your business finances, but you may be able to negotiate reductions in exchange for early payments. Some vendors may offer discounts for invoice payments before the date they are due. There are additional ways you can optimize your accounts payable.
- Use invoice management software: If you are a Square seller and use Square Invoices, Square Bill Pay allows you to organize and streamline paying bills and vendors using your Square Checking account (or any debit or credit card). You can upload a bill, choose how you want to pay, and send a payment through to pay for expenses like rent, supplies, or contractors.
- Work with a professional: Maintaining a record of your accounts payable and receivable helps you keep track of your business’s cash inflows and outflows. If you are working with an accountant or tax professional, this may come in handy for filing taxes or forecasting business decisions.
- Automation: Consider software that can automate your accounts payable. This can help schedule payments and monitor whether they go through. Depending on the software, this can catch errors like double payments or missing a payment deadline.
- Set favorable payment terms: By paying bills ahead of time or on time consistently, you may be able to negotiate more favorable terms with your suppliers. These terms could range from discounts for early payments to extended payment periods.
- Optimize tracking: You can leverage centralized accounts payable systems to make sure your business stays compliant with payment-related requirements, whether you use software or a professional. You can also regularly review your expenses and use that information to inform business decisions. For example, you may find opportunities to source alternative suppliers or vendors based on your findings.
Whether you are looking to decrease errors, organize your payments, or simply understand how your accounts payable processes are working, consider some of these strategies. Upholding these best practices can ensure accurate record-keeping, regularly monitor cash outflows, and help you budget and forecast.