Updated: May 20, 2020
Accounts Payable 101
Basically, Accounts Payable is the money your business owes. Your business needs lots of things to be in business: inventory, office supplies, services like phone and internet, the list goes on. And when you accept delivery of these things and you have a term to pay for it, that’s a debt you owe. That debt is a pending outflow of cash and thus an Account Payable. You still have the cash in hand, but you already owe it to someone else.
Like with Accounts Receivable, you’ve probably dealt with Accounts Payable every day of your adult life. Think about your electric bill. The electric company gives you have electricity to have in your home all month. You use it and have the advantage of running your fridge and watching TV while the electric company makes the outlay. But you have an agreement with the electric company: you owe them for the cost of that electricity at the end of the month. They credit you the electricity and you pay them back. That, in essence, is an Account Payable: you receive a product or service and then pay back the person or company who provided it to you.
Why Pay Attention to Accounts Payable?
You’re in for a world of hurt if you don’t manage your Accounts Payable. Why? Well, for starters, if you're unclear on who and what your business owes, you can’t really be sure of its financial situation. Compounding that, if you become known for sloppy, haphazard Accounts Payable practices, you’ll build a not-so-good reputation.
Mismanaging Accounts Payable can quickly cost you money. Missing payments or making partial payments can lead to late fees, increased interest charges, or even losing a supplier—all bad things. It’s one thing to forget a payment every now and then, but if it becomes a trend, you've got a serious issue on your hands.
But when you’re awesome at Accounts Payable, you’ll build trust with the entities that make your business possible. That can lead to better deals or rates or even leniency for that oh-so-rare late payment. And a happy vendor will likely vouch for you however you may need down the road.
How Can I Responsibly Manage My Accounts Payable?
Subconsciously (or maybe blatantly), all small business owners hate seeing money go out the door. However, there are some things you can do to make it sting a little less:
Ask about discounts for early payment or for outstanding payment history. Just like you want your customers to pay you on time and in full, your creditors want the same thing so they may be willing to offer an early payment discount. That’s a good thing to take take advantage of in flush months. Additionally, some creditors will reduce interest rates or offer discounts for a certain number of payments made on time and in full. You’ll never know if you don’t ask.
Set-up automated payments and alerts. Remember those “set it and forget it” infomercials? The same can apply to Accounts Payable (to an extent). Automatic or recurring payments are a great way to ensure that you never forget to send the check or log-in to your bank and allocate the money. And if you’re worried about how that impacts month-to-month cash flow management, set up recurring calendar alert a few days prior to the bill due date and double check that the account it draws from has the available cash.
Negotiate your terms. Many contracts come with standard terms, net 30 or net 60, but that doesn’t mean that your supplier won’t consider other options. After all, contracts are meant to be negotiated! So why would a vendor offer you alternative terms? Well think about it this way: they want to make a sale just as bad as you do. So if 10 additional days is the difference between making a sale and not, many vendors will be willing to negotiate. But be careful: negotiating term could raise suspicion about your cash flow.
Be proactive. If you anticipate that you will have a problem paying a creditor down the line, approach them as early as you can. Discuss the issue with them instead of avoiding them. Not only is this the right thing to do, but it’s also your best way to start the discussion around new terms or a modified payment plan.
Pay down debts with high interest first. Say you have a great month and you have extra cash on hand. Use that opportunity to pay off high interest debt. You will reduce the amount of cash going out the door to interest, which isn’t really helping your bottom line at all.
Managing your Accounts Payable efficiently and responsibly is great for your bottom line. Who knew that paying bills could feel so good!
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