If you're feeling bogged down by the busywork of tracking bills and payments, or if you've found yourself being a less-than-ideal client to your providers, then there's a good chance your accounts payable system isn't up to snuff.
For businesses in their early years, often a trusty Excel file and a business check-writing system are enough to keep accounts payable adequate. But if your business has grown and you're now spending more than a few minutes a day (or an hour a week) on managing payments, experts say you should look to tweak a few things. And doing so will not only save you time in the long-run, but increase the accuracy of your balance sheets. Prompt payment of bills will also make you seem more credible in the eyes of your vendors service providers.
"If you've taken the leap of faith to go into business for yourself, driven by the passion for what you do, you want to spend less time fretting over the books and a lot more time doing what you're great at (so you can get paid for it)," says Mitch Solway, a small-business finance expert who is the vice president of sales and marketing for online expense-tracking software FreshBooks. "But it's still a critical piece of your business."
If you need motivation to upgrade your system, just take a look at the numbers. Companies with streamlined accounts payable systems are efficient in terms of time and staffing, according to a study by the American Institute of CPAs. The average billion-dollar company processes 12,500 invoices per employee dedicated to accounts payable. That's about $3.55 per invoice. By contrast, the companies with the best accounting departments process invoice at a cost of $.35 each – and that can save $40,000 a year. Even if you're not a billion-dollar company, the savings – and headaches avoided – can resonate.
Dig Deeper: More Advice on Accounts Payable
Streamlining Accounts Payable: Reevaluate the Basic Structure
If you are receiving more than a bill or two a day, you should be using an accounting program, such as QuickBooks. If you like the style of online money-management programs such as Mint, you might work well with an online system such as Outright or FreshBooks. If those programs aren't natural for you to use, you can take a class or hire a coach to get you started. What's not an option is letting someone else do it all for you.
If your business has several employees, it's just fine to have an administrator involved in entering data into the accounts payable, but you should plan to keep final tabs of it always, advises San Francisco-based financial advisor Kathryn Amenta.
"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."
Of course, there are exceptions. If your business is large enough to have or hire an accounts payable professional, that's a step to consider. But in general every CEO should have her eyes on and fingers in the books every day.
Some basics you should already be doing:
• Every incoming bill should be entered into your accounts payable file daily, with date of arrival, date due, relevant account information and comments.
• Business credit-card items should ideally be filed on the same day they are expensed.
• Employees should be comfortable and trained in filing expense reports. If evaluations show you that it's a drag for them, consider implementing a piece of software that will help, such as Expensify. Also, segmenting all employee expenses onto individual business credit cards can both eliminate false reporting and ease uploading expenses.
• For classic paper bills, retain the stub and envelope for records as well.
• Bills should be paid promptly, but en masse. Set a time at least once a week for yourself or your accounts payable staffer (or assistant) to do this. If it's someone other than you managing payments, be sure to review approve the list before sending out checks.
Dig Deeper: One CEO's Effective Accounts Payable System
Streamlining Accounts Payable: Enlist an Advisor
If you're still spending too much time paying money rather than making money doing what you're good at as a CEO, you might feel it's natural to delegate some of your bookkeeping responsibility to an assistant. You may also consider a certified public accountant or even a part-time CFO.
Kathryn Amenta, a San Francisco-based financial advisor, suggests that an accountant with a regular monthly relationship with your company can help streamline the process by advising you on time-saving methods – and they can catch costly errors. Moreover, they'll have your future financial health in mind. "That person can also help craft a plan for going forward, say, a two-year plan," Amenta says. "It's really important to look at: What is this business paying too much for? Is this business venture supporting itself?"
A part-time CFO can step in if your needs are more strategic in nature, or if you are setting up the business to scale. "They are people who have reputable business and finance training and now make business their livelihood," Amenta says. "They have a number of clients, and can come in once a month to oversee what's going on financially."
Dig Deeper: Renting a CFO
Streamlining Accounts Payable: Avoid Fraud
If you've never paid a double check, a fraudulent bill, or experienced some level of employee embezzlement, consider yourself lucky. Accounts payable is a flashpoint for fraud in many companies, large and small.
To avoid fraud, you can institute a variety of checks and balances. One simple method is to separate duties. A junior employee can process and print a check, but a senior one – maybe even you – should be required to review and sign it. This dual duty can be incorporated into most basic business accounting software, so employees can only access and perform assigned functions. For checks that exceed a predetermined amount, requiring a second signature – either from you or your CFO – is a best practice. Separating the process of adding a new supplier to your system from the ability to issue payment is also advised.
If your company incorporates employee expenses into your accounts payable system, you might insist that employees use a business credit card – one per employee – for paying and filing expenses. "Fraudulent cash purchases are fairly rampant in companies of any size," says David Barrett, CEO of Expensify. "With software that uploads data directly from your card account, you can't report the same expense twice."
Dig Deeper: Catching Costly Errors
Streamlining Accounts Payable: Assess Your Weaknesses
Once you're accustomed to your accounts payable system, you'll naturally start to see trends. Notice when the most spending occurs for your business. What categories of spending vary from month to month? When do you rely most heavily on suppliers' credit?
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 your relationships that might come under stress.
Amenta advises clients to be proactive. Be honest with your suppliers about when, if not within the payment window, they can expect to receive a payment.
"I believe they should act quickly. 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 sheets to prove you've got the means on the way.
Dig Deeper: Keeping Track of Crunch Times
Streamlining Accounts Payable: Simplify Auditing
If you're transitioning to a new accounting software, accountant, or part-time CFO, tax-time can be tough. That's because auditors focus on invoices, expense reports, and your own payable list to record annually your expenses.
It's best to make a transition to a more streamlined accounts payable system at the start of your fiscal year. If that's not going to be the case, ask your accountant to help you ease the transition from the start, by inputting the rest of the year's previous data into your new system.
Working with the same accountant throughout the year and through reporting your taxes is the best way to streamline the process. If that's not possible, you'll want to make sure you have documentation to support your own accounting of payments, including transaction confirmation from your suppliers.
Dig Deeper: Best Practices for Accounts Payable