What is Accounts Payable and How to Manage Them?
When a business purchases a service or a product from a supplier (not paying cash at the time), the payment amounts are recorded into the company’s financial statements and released when the due date states on the invoice (often 30 days later). The record of unpaid money and due invoices that you owe to suppliers or vendors is known as accounts payable. This accounting term provides you the information about the pending payments for services and products you have on credit. Accounts payable is a very important element of financial bookkeeping; the sum of all expenses that a business owes to its suppliers must be placed in an organized manner to avoid inaccurate cash flow management and not having enough cash to pay its obligations. In this article, we will discuss how to manage accounts payable.
How to Refer to Accounts Payable in the Financial Statements?
If you are running a business or owning a company you must know the basics about financial statements. A financial statement is an organized collection of all the information and details about the company’s economic situation: assets, liabilities, and net income. Accounts payable is an essential element of the financial statements and is included within the ‘balance sheet’ or ‘statement of position’. The balance sheet is comprised of three different sections: assets (what you have), liabilities (what you owe) and net worth (what is left).
Accounts payable is included in the section of liabilities on your balance sheet. By correctly setting your accounts payable in the liabilities section, it will help you to know the true worth of the company at that specific time. Because you have purchased the products and listed them in the assets section (what you have for example in inventories), and it is important to balance the assets increase by adding the due payments in liabilities.
How to Manage Accounts Payable?
In today’s economic environment, companies need to pay as much attention to their finances as to their operations. First you need systems combined with strategies. A system means a proper working method to execute your accounting to provide the information you need to achieve the strategy, this will help you from the simple prevention of erroneous payments to financing your operation correctly and achieving your financial goals. When it comes to the management of accounts payable here are some important elements that you could include in your strategies to streamline the process.
#1. Centralized Clearance of Invoices
Centralized payment means the clearance of all the invoices from different vendors through a single account. It is very helpful to centralize your payment method because it facilitates the releasing of due payments all together, reducing time and errors.
#2. Practice Paperless documentation
Most businesses are considering adopting a paperless management system for their accounts and finances. It is very important in this era of technology and automation. If you are using paper to keep the record and manage the accounts payable, shift to an electronic method of data keeping and data exchange. Going paperless is a very quick and effective way of processing the information and communicating with vendors whilst you can also track the payments easily.
#3. Tracking of Released and Pending Payments
You may be thinking that it is just a time-consuming thing with no considerable benefits but payment tracking appears very helpful when you are making a budget or measuring the cash movements of your company. For this purpose, you can also use payment tracking and management software, forecasting when bills are to be paid and what impact on cash balances it will have, resulting in better cash flow management.