4 Things Your Accounts Payable Can Tell You About Your Business by Debra Sears, CPA
Posted on October 03, 2024
by
Debra Sears
As your business grows with new customers, products or service offerings, your expenses will likely increase. How you manage these liabilities can significantly impact your operation’s cash flow, credit ratings, risk of fraud and your relationships with vendors and suppliers. The key to ensuring a healthy financial picture is learning how to analyze your accounts payable and take steps to improve them.
Accounts payable (AP or A/P) refers to the money a business owes to its vendors, suppliers, contractors and other creditors for the goods and services it receives. It is represented on the balance sheet as a current liability from the moment the business receives goods or services until it pays off that amount in full. Between those two points, the business is responsible for processing invoices, matching them to original purchase orders and shipping documents, proper receipt of goods, processing payments and ensuring payments are made by required due dates. Thankfully, businesses today have access to a variety of cloud-based accounting systems that automate these processes, reducing the time required to complete these tasks and the risk of manual data entry errors. However, not all businesses recognize how these solutions can help them make better, more informed business decisions. Here are four things to keep in mind when assessing your AP processes.
Cash Flow
Analyzing AP trends can provide keen insight into cash movement and whether the business manages that liquidity effectively. This can help the company prioritize bill payments, avoid late payment penalties and budget more accurately for spending throughout the year. For example, a review of payment history by vendor and category can help the company track actual spending against budgeted expenses to avoid a potential cash shortfall. Generally, the longer the average payable period, the higher the amount of cash the company has on hand to pay salaries, purchase inventory or invest in other areas that support its growth and financial performance.
Vendor Relationships
As a rule, timely payments to suppliers increase a business’s creditworthiness. This, in turn, can improve a company’s standing with creditors and ultimately yield more competitive prices and better payment terms with vendors. Moreover, a good credit history goes a long way to helping businesses secure a loan or line of credit in the future.
By contrast, a series of late payments will signal to the supplier that the company may have difficulty paying its bills. This can lead to late fees, interest charges, higher costs for products and services and generally unhappy suppliers who may cancel orders or end their relationships with the company altogether.
Expense Management
AP reports provide businesses with a deep dive into their expenses and spending patterns, including payments by department, category, vendor, and location, as well as the outstanding amounts due to suppliers of required goods and services. With this information, companies can be more strategic in prioritizing bill payments with a watchful eye on cash flow to ensure that they neither pay bills too early nor too late. They can also identify essential spending trends, such as where costs are rising, and take action to either plan for those higher expenses in their budgets or negotiate better terms with vendors, including early payment discounts.
Operational Efficiency
In addition to helping businesses manage expenses and cash flow, accurate AP reporting is critical for improved operational efficiency. It creates a clear audit trail of a company’s financial transactions and activities, from purchase order to final payment and recording on its financial statements. It helps businesses verify the legitimacy of invoices and payments, thereby reducing fraud risks while ensuring their financial records comply with tax and other regulatory laws.
About the Author: Debra Sears, CPA, is an associate director of Managed Solutions and Technology with Berkowitz Pollack Brant Advisors + CPAs, where she helps entrepreneurs, privately owned businesses and nonprofit entities automate accounting functions and gain greater insight into information needed to make mission-critical business decisions. She can be reached at the firm’s Boca Raton, Fla., office at (561) 361-2000 or info@bpbcpa.com.
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