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.
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.
One simple and necessary step to knowing how much flexibility you have on paying each account is to review existing supplier payment terms. If you have a contract with a supplier, it should include payment terms and available credit. Keep these on file so you can reference them if you should get in a tight spot.
Be cognizant of the risks of getting behind on your bills. You may alienate reliable providers, risk damaging your company's credit, and could ultimately face legal action. Unpaid bills also cause stress and distraction at a time when you should be focused on managing your business.
Setting Up Accounts Payable: Recognizing Trouble Spots
Once you're accustomed to your accounts payable system, you'll start to observe trends. Notice when the most spending occurs for your business. What categories of spending are most in flux? When do you rely most heavily on your suppliers to finance inventory?
For retail companies, the holidays are a time of tremendous inequity of accounts payable and accounts receivable. The goal is to be financially prepared for times of big spending that come in advance of payments received, but when that doesn't happen, there are a couple of simple things you can do to maintain relationships that might come under stress.
First, Amenta advises clients to be proactive. Be honest with your suppliers about when, if not within a 30- or 60-day window, they can expect to receive a payment. "Pick up the phone, call creditors and let them know what's going on," she says. "Be clear. Say 'I'm going to pay this much this month, and this much next month, even if it's just a token amount so they know you are on it."
Second, thank your suppliers for their flexibility and remind them about your prompt previous payments. If they become hostile about not being paid, offer references to your long-term financial stability, or even last year's balance sheet to prove your continued viability. Help them get over their "check-is-in-the-mail" concerns.
Dig Deeper: What to Do When You Can't Pay a Bill
Setting Up Accounts Payable: Choosing Business Accounting Software
Once your accounts payable grows beyond the size of a bill or two a day – or a manageable handful of checks to cut each week – you might want to consider either putting an employee in charge of the basic data-entry and accounting or adopting software to streamline the process.
Some free options online can help at any stage of your company's growth. Check out Outright, a free online bookkeeping system with a clean aesthetic. Some businesses swear by QuickBooks, which offers a free online trial. Intuit's Quicken is another choice. If expenses are a big part of your accounts payable, check out software options that help integrate employee expenses into your accounting system, such as Expensify or Concur.
If you're looking to implement software but don't feel as if you have the time or skills to set up the system, you can always hire a business accountant or bookkeeper to integrate an accounting system for you. Hiring for a quick set-up process should only require a contractor. Search sites such as eLance.com or TeaSpliller.com or even Craigslist can help you find a qualified professional in your area.
Dig Deeper: How to Choose Business Accounting Software
Setting Up Accounts Payable: Additional Resources
With a variety of training and professional development programs for people working in accounts payable, the non-profit group International Accounts Payable Professionals can be a great training resource. The group's website also offers accounts payable form templates for you to download.
If you're just getting started and find yourself unfamiliar with some of the terminology involved in accounts payable, check out this thorough online glossary.
The Financial Managers Society is another professional organization where you can look for advice, tools and guidance.