In the construction industry, the value of correct accounts payable and other accounting records cannot be underestimated. These expenses are what most contractors depend on to make money. Accounts payable management — keeping accurate records and timely payments — is critical to every construction company's profitability. Improving the maintenance of these records would assist in ensuring that everyone is paid on schedule and correctly.
What is Account Payable?
Accounts Payable (AP) represents the amount a company owes to a vendor or a seller for purchasing their product or service, which has not yet been paid. For example, you purchase $5,000 worth of material from a vendor and the vendor gives a certain time period to pay. $5,000 is recorded as AP and has to be paid within that period. Once the amount is paid, the AP account will be reduced by the same amount as the liability is cleared and you no longer have to pay.
What is Account Payable in Construction?
The amount you owe to vendors and subcontractors for company costs and expenses is referred to as accounts payable. It includes all costs, including overhead, direct, and indirect costs.
Unpaid payments are called the company's accounts payable from the time the vendor bills you before you make payment. The number of unpaid bills will, of course, fluctuate. In this way, it's similar to accounts receivable in this way.
Accounts payable are often connected to payments received in accounts receivable, particularly in the construction industry. In other words, many companies don’t pay their bills until they receive payment from their customers. This is most commonly the case with project direct costs: Typically, overhead and other company costs are charged as they are incurred.
7 Tips To Improve Accounts Payable Management For Construction Companies
Accounts payable management entails ensuring that all invoices are properly compensated for and charged on schedule. Having a process in place for this is critical as the company progresses. Here are a few suggestions to help you boost your accounts payable management.
1. All invoices should be addressed to a single individual or email address.
This helps prevent confusion on the part of your vendors about who to send the invoices to and makes it easier for you to track if an invoice has been received.
You should encourage your vendors to email invoices instead of faxing or mailing them, as emailed invoices can easily be recalled and reprinted.
2. Online Accounting Software to Track Invoices and Payments
Switching to an online accounting software platform, such as Xero or QuickBooks Online, can help you handle your accounts payable tasks more effectively.
Cloud-based bookkeeping software makes it easy to create purchasing orders (POs) for each product or service you buy on account, then match supplier invoices to those POs before issuing payment.
You can also monitor your outstanding AP via aging reports, which can be checked by your bookkeeper or management team.
3. Enter all invoices that you receive in your accounting software.
This guarantees that you have a list of all incoming accounts payable. Doing this before distributing the invoices for review or coding ensures that you have a record of all incoming accounts payable. There is no way to determine whether an invoice was issued or whether it is sent to managers for review before being entered into the program. This will result in misplaced invoices and unaccounted-for expenses.
4. Track retainage owing and paid.
Make sure you're keeping accurate track of the retainage you owe your subcontractors. This should be tracked by construction accounting software. If you're monitoring your expenses with another software application or a spreadsheet, you'll have to keep track of these numbers by hand.
5. Move Toward a Paperless Environment
While some business owners prefer to have a hard copy of their documents on hand, going digital is equally safe and secure and simplifies financial management. When communicating with vendors online, for example, a digital "paper trail" is created that is much more accurate than a tangible one.
Consider requesting electronic invoices from all of your vendors in the future to start working toward a paperless AP system.
6. Note any joint check payees and amounts on the invoice.
If a subcontractor or supplier requires a joint check, make a note on the invoice or in the software so that the person creating to create the checks also aware of it. This is especially vital if the person making the checks is not the same as the person who entered the invoice as well
7. Consider Outsourcing Your AP
Setting up an automated AP process and managing it in-house can be difficult for busy business owners. This is where bookkeeping and business process services can come in handy.
Outsourcing your accounts payable from bookkeeping professionals like Irvine Bookkeeping could be the right choice if you don't have accurate visibility of your company's results and financial status, and you lack the time or skills to improve your account payables.
If you're feeling frustrated by the need to assess and develop your accounts payable process, we have the technology and experience to fill any gaps in your back-office accounting functions.
>> Read More: Construction Accounting 101: A Basic Guide
If you, as a business owner, see that you cannot handle accounting on your own, consider hiring an accountancy service for contractors to help you with it.
Call Irvine Bookkeeping now for a Free Quote!
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