Accounts payable management is key to your small business’s success. And of course, the first step to managing accounts payable (AP) is understanding what accounts payable is.
Here, we’ll look at the basics of AP, what types of businesses use AP management, and some tools for taking control of your payables.
We’ll also talk about why it’s so important to get this whole process right.
(Spoiler alert—Cash flow is why it’s important.)
What is accounts payable?
Accounts payable is the running tally of the outstanding bills a company owes for goods or services.
An accounting term for money a business owes, accounts payable is the effective opposite of accounts receivable, which is a term for money others owe your business.
These debts, or payables, are treated as liabilities in your business’s accounting system.
For larger businesses, whole departments may exist to manage AP. These departments centralize outstanding invoices owed by the business. They can then cut checks and manage payments based on cash flow needs, invoice due dates, and other internal concerns.
As a smaller function, accounts payable managers may work on fraud and error detection to ensure no employee abuses or accidentally misuses company funds.
How does accounts payable work?
For small businesses, accounts payable is more or less just a term thrown around in accounting software. Many of the expenses small businesses incur are paid immediately, thus skipping the accounts payable “department.” Those that aren’t immediately paid may go on a credit card, which can be tracked in a payables account.
For example: You need a new printer. As a five-person business, you’re just going to head over to Staples or Best Buy and pick one up, paying with your business credit card. That expense is then entered in your accounts payable, under credit card payables or a similar subheading.
Then, when you pay the credit card bill, you’ll mark that entry as paid and clear the balance out.
For larger businesses, even small purchases may end up in AP, as the business may have an invoicing agreement in place with its providers. You might buy ten pens and put the charge for them in a growing accounts payable bucket, which is invoiced by the stationery company monthly.
A smaller business, on the other hand, would likely make that payment with cash, entering the purchase as a simple expense.
How can small businesses manage accounts payable?
Managing accounts payable can be done in one of two ways: the old-fashioned manual way or the new-fangled software way. Accounts payable software is often already included in your existing accounting software package, but you can also track down dedicated software.
The benefit to using your existing accounting software is that everything is in one place. You don’t have to learn a new system or worry about integrations and compatibility.
You’re also unlikely to have more than one or two people actually generating bills, so the risk for fraud and mismanagement is much smaller. The more powerful workflow and reporting tools that come with stand-alone software would likely be more than you need.
On the other hand, larger small businesses—you might call them “medium” businesses—can often get a lot out of those extra features. They allow you to set spending limits, design approval processes, and see who’s been spending what in simple reports.
This insight can go a long way toward managing or cutting costs across your business.
Keeping your cash flow organized
People will tell you that profit is important—and they’re right. The key to a great business, though, is knowing how to make that profit work for you. This is the basis of cash flow management, something small business owners often learn very little about.
Think of it this way; if all your income comes on a bimonthly schedule, but all your costs are billed monthly, you could be ahead on paper and still have things fall apart. Managing your inflows and outflows—revenue and expenses—can keep your cash flow positive and help you keep the doors open.
Accounts payable is half the battle. Knowing how much you owe, when you owe it, and how much money you have for paying it can help you keep cash on hand for as long as possible. Ever wonder why Big Corp always pays you exactly 30 days after it receives your bill and never sooner? Cash flow.
Learn from Big Corp. Get a handle on your accounts payable and keep the lights on. You can get a head start on things by checking out Capterra’s accounting software and accounts payable software directories.
Looking for Accounting software? Check out Capterra's list of the best Accounting software solutions.