How to Set Up Accounts Payable
Here are some simple guidelines to follow in order to formalize your bookkeeping system for business payments and outstanding invoices.
You've got to spend money to make money and, at any given time, your business undoubtedly owes someone something. Even if you're a solo entrepreneur or an independent contractor, you're likely spending for business purposes, and you need to keep track of expenses – both before and after they're paid.
Though the terminology can sound intimidating, accounts payable is simply the process of accounting for and paying invoices—it's your company's updated list of debts and liabilities. Managing accounts payable boils down to adding an invoice to a log – it can be as simple as an Excel spreadsheet – as soon as you receive it. When you pay a bill, you should remove it from your current log.
You probably already have an accounts payable system, however meager. If you track in a to-do list or calendar what bills are due, voila. That's your starting point.
Formalizing accounts payable into professional documents so is not difficult, nor should it take a great amount of effort, says David Barrett, who worked in a string of start-ups before creating Expensify, an online finance program that aims to simplify business expensing. "Overall, setting up accounts payable doesn't have to be terribly hard. There are bigger problems for any small business to deal with, so don't stress," he says. "But foresight here can save a lot of headaches down the road."
As your business grows, your accounting system will likely grow more complex, as you turn your focus to maximizing cash flow and integrate with suppliers. Strong accounts payable can also give you a leg up in managing your critical numbers and developing financial reports for your bank or for outside investors. We've compiled a guide to getting started on the right track – and incorporating best practices – to managing your accounts payable.
Dig Deeper: Basic Small Business Accounting Tips
Setting Up Accounts Payable: Getting Organized
If you have a business banking account (hint: you should), and you're setting up a formal accounts payable system for the first time, you should pick an application with which you're comfortable. Any spreadsheet or online finance program will do. For offline, manual-entry accounts payable, Excel is still the standard. QuickBooks is a good online option, and you can often find local classes to help you learn the in's and out's of recordkeeping. If you already use an online personal money-management program such as Mint, you might take a look at Outright.
Once your system is set up, every receipt, business credit-card item, and incoming bill should be entered into your digital file. You'll also need to keep your paper bills organized. Prepare to open them immediately, enter them digitally, and file the hard copy until it is paid. Once it is, retain a stub both virtually and in hard copy.
Your next decision: Will you be the only person handling accounts payable? If not, who else will have access to this information and for what purpose? If your business has several employees, it's just fine to have an administrator involved in entering data into the accounts payable system, but you should plan to keep a close eye on it always, says Kathryn Amenta, a San Francisco-based financial advisor.
"I would recommend a business owner understand their finances fully before they turn it over to someone else to handle," she says. "It's super-important as an owner to have a finger on the financial pulse. That's the bottom line – that's why you're in business."
That said, in growing companies, it is advisable to have more than one pair of eyes on outgoing payments to avoid both honest mistakes and billing fraud. If you have a head of finance, he or she should oversee bookkeeping operations and keep you updated on your company's payables.
Another consideration: Is there anything else you want to incorporate into accounts payable? Employee expenses are one possibility if you use the cash-based method of accounting rather than accrual. If you don't know which of these you will be using, or if you're not yet registered as an LLC or an S or C corporation, you should pause here and make some key decisions about incorporation.
Dig Deeper: How to Choose the Right Legal Structure
Setting Up Accounts Payable: Listing Expenses
If you're using a straightforward cash system, the expenses you classify as accounts payable can include any of your own that are not strictly personal. Barrett suggests that you – and any employee allowed to file expenses – might want to be extremely disciplined about using a business-only credit card for expenses. "As you are growing, having everyone make purchases with on one business credit card is a great way to mitigate fraud," he says. "Fraudulent cash purchases are fairly rampant in companies of any size, and with software that uploads data directly from your card account, it's harder for someone to try to report the same expense twice."
If you're using a spreadsheet rather than an accounting program, a basic template should include, in rows, the invoice provider's name, account number, the category of the expense, the date the invoice was received, and the amount to be paid. Ideally, you'll want to get this information into the spreadsheet as soon as a bill arrives.
You'll need a few other forms, too, for enclosing with payments, and to keep your own future books. Sample templates can be found on the site of the non-profit educational organization International Accounts Payable Professionals.
Dig Deeper: Best Practices for Accounts Payable
Setting Up Accounts Payable: Establishing Invoice Schedules and Other Guidelines
Once you have the basic tools in place to track accounts payable, remember exactly why you are doing so: To monitor spending and maintain good relations with your service and product providers. For the latter, it is important is to establish a standard window for payment – with a reasonable expectation being to have each bill paid within 30 days.
Amenta recommends you go a step further and strive to have any given bill mailed out three weeks before it is due. That will earn you professional respect from your suppliers. You can also, after a time, ask them about discounts or added-value services in return for prompt payment.
Another goal of a sound accounts payable system is to monitor and maintain cash flow. Having a parallel, well- functioning accounts receivable system will help with this. Getting behind on your bills might seem inevitable in a start-up, but both of these systems can help you recognize and mitigate imbalances – by, for example, identifying seasonal patterns cush as periods during the year when purchases might outweigh sales.
