How to Manage Accounts Payable Effectively

How to Manage Accounts Payable Effectively | Accounting Smarts
Charles Hall

Last updated by

Charles Hall

on

March 1, 2021

Accounts payable is effectively managed when you use accounting software, streamline the process, negotiate terms, and maintain accuracy.

The role of accounts payable is to make payments and control expenses. This is done by processing, verifying, reconciling and reporting on all transactions related to the expenses of a company. By managing payment cycle activities in an efficient and effective manner accounts payable can actually save the company money.

Accounts payable is effectively managed when at a minimum the following 4 steps are implemented:

  1. Use accounting software.
  2. Steam line the accounts payable process
  3. Negotiate vendor terms
  4. Maintain accounts payable accuracy

Take a minute to review each of these steps in more detail. You might find a suggestion or two that could revolutionize your accounts payable process.

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Table of contents

Use accounting software

Technology will save you hours of time in processing simple and repetitive steps that manually would take a lot of time.

  • Invest in software. If you are a small business you may think accounting software is out of your budget. However, this is far from the truth. There is online software that costs as little as $30 per month yet saves you hours of time. Check out Xero.com. Accounting software will track invoices, due dates, provide reports, and even print the checks. All of this improves your efficiency in managing accounts payable.
  • Setup accounts payable correctly and update vendor information. If you use accounting software, make sure the accounts receivable module is set up correctly, even if it requires an expert to look at it initially. Secondly, ensure all vendor information is complete and accurate including, addresses, phone numbers, preferred method of payment, and vendor terms. These steps will prevent errors when aging accounts payable and printing checks.
  • Enter invoices timely and accurately. Encourage accounts payable employees to enter invoices the same day they receive them. This does two things. First it keeps your accounts payable balance accurate. Secondly, it prevents double entry by flagging you if you try to enter an invoice a second time. Also, by double checking entry amounts, dates, and invoice numbers you allow the system to do the work accurately.
  • Review accounts payable aging reports. The aging report is the most important accounts payable report. It helps you understand the pipeline. Knowing what is out there and what is coming up will help you understand how much cash is required and when. It prevents you from missing payments and creating frustration and time wasted calls from vendors.

Streamline the accounts payable process

By making your process simple, streamlined, and empowering your employees you can save tremendous time and money in the accounts payable process.

  • Limit the number of check runs. By simply batch processing checks once a week or twice a month, your efficiency will dramatically increase. There are several steps associated with processing checks including approvals, stuffing envelopes, and matching invoices to checks, so processing in bigger volume and less frequently produces economy of scale. It saves time.
  • Empower your staff. Getting approvals is one of the most time-consuming processes. By training your accounts payable staff and giving them guidelines, they should be capable of selecting bills for payments, including partial pay and delayed payments. They know the vendors, so by giving them a payment ceiling they can make the decisions that meet the needs of the vendors and streamline the process greatly. You still retain right of refusal when signing the check.
  • Ensure invoice documents are organized. Prior to submitting checks for signature, accounts payable staff should make sure all invoice documents and backup are complete, have proper approvals, and are clear. This improves the efficiency of the check signer. They can match check amounts to invoices and verify the purpose in an easy and streamlined manner.

Negotiate vendor terms

Negotiating vendor terms is one of the best ways to manage cash flow and therefore effectively manage accounts payable.

  • Negotiate longer terms. Most invoices come with 30-day terms. Consider calling your vendor and negotiating 60 or even 90-day terms. The slower you can pay the better.
  • Negotiate discounts. Many vendors will not extend the length of time to pay, but they will offer a discount for paying early. 2% 10 days is a common discount which means you receive a 2% discount if paid within 10 days of the invoice date. This assumes you have the cash flow to pay early, but consider the effect if you receive discounts on most of your orders.
  • Negotiate paying late. At times cash flow may be a challenge, if you have a good relationship with your vendor, they will understand and allow you to pay an invoice late. 

Maintain accounts payable accuracy

One of the biggest challenges with accounts payable invoices is accuracy on the part of the vendor/supplier. Making sure invoices amounts, dates, and terms are correct is essential.

  • Get pre approval. There are two ways to get pre approval using purchase orders or requesting proforma invoices. A purchase order is a document you issue to the vendor authorizing them to sell you goods or services for a specified amount, time and place. This document should always be matched to the actual vendor invoice to confirm they billed according to the authorized purchase order. Variances happen all the time so taking the time to check is critical. The second method is just to ask the vendor for a proforma invoice. This document is typically issued prior to delivering any goods or services. It provides written proof or a contract so to speak. This also allows you to provide a copy to a superior who would give preauthorization to spend the money.
  • Accounting records. Create a filing system to keep track of all hard copy invoices received from vendors. These records become the backup and support for the transaction. If they can be scanned into your accounting system and matched to the vendor that is good. Or an alternative is to create an alphabetical file based on the name of the vendor. Each invoice is filed according to the vendor name. This makes it easy to pull the invoices and match to the checks prior to signing.
  • Centralized payment. Payment records are important for accounts payable as they become proof of payment. However, in our society today there are many methods of payment from credit cards, to checks, to wires, to ach, to Venmo, etc. Keeping accounts payable payments with one centralized bank helps. While you may have different methods of payment, if it all comes from the same bank, you have all that information in one spot.

While some of these steps may seem to fit more into a medium to large company, the principle applies just as much to small business. By creating accounts payable policies and procedures you open the door to better cost savings and cash flow management.

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Charles Hall

Charles Hall

Charles has spent 25 plus years in the world of accounting and business. His experience includes working as a CPA/Auditor international accounting firms. He has worked as a controller and as a COO for small to medium sized companies.

Learn more about Charles Hall