Achieving a balance between incoming and outgoing revenue isn’t always easy, but it’s vital for the long term success of any business, no matter its size or industry.
A successful business must continually balance revenue with operational and growth costs, and careful management of accounts payable, or AP, is usually a critical factor in this. Enabling a business to maintain healthy relationships with suppliers, vendors and other essential providers, AP management with help from professional accounting in Coral Gables, can also help them prevent expensive mistakes, stop fraud, and maintain a consistent cashflow. Poor AP management, on the other hand, may hamper a business’s ability to get the services or materials needed to remain operational, blight their reputation, and trigger costly IRS penalties among others.
The 3 fundamental building blocks of AP management
For every company, there are 3 building blocks upon which AP management rests: documentation, control of approvals, and timing of payments. Let’s look at each a little more closely:
- Documentation – accurately tracking what your company owes, and to whom, is very important. Each invoice must match a purchase order and receipt.
- Control of approvals – someone trusted must check and confirm all invoices against items or services provided, before they are paid.
- Timing of payments – although it may be tempting to pay invoices immediately, this could leave you with limited cashflow. Finding a balance that prevents late fees and doesn’t strain creditor relations, while keeping cashflow healthy, is key to the timing of payments.
AP management best practices
For smaller businesses, there are a number of best practices that can be followed to keep AP management stable, and help them refine their approach over time.
Firstly, AP processes should be centralized, with a system for receiving, recording and approving invoices that is both secure, and consistent. To make AP records simpler to track and limit the chances of documents or invoices getting lost, digitalization is recommended. An added bonus of this is that payables can be analyzed to help identify any worrying trends, or to seize upon opportunities.
With help from AP software too, you can keep track of key metrics such as Days Payable Outstanding, or DPO, by measuring how long it takes a company to pay creditors.
With the regular monitoring and benchmarking of this and other key metrics, it becomes easier to make payments that are optimally times, manage cashflow, and build strong reserves of cash.
Having payment approval policies that are clear, complete and enforced rigidly, is also important, with only trusted individuals being afforded the power to give approval for policies. Some companies even make it essential for more than one individual to give approval for bills that are above a certain amount.
It may also be wise to rotate the duties pertaining to invoices, which can help put a stop to fraud, as well as reconciling the AP ledger with supporting documentation to detect mistakes or signs of potential wrongdoing. Working with a company providing tax preparation in Coral Gables can also help highlight any issues or concerns, and alert company owners to potential fraud.
Keeping a strict control of accounts payable and managing the entire system efficiently, might not be the most fun part of running a business, but it’s almost certainly one of the most essential. If you need help managing your accounts payable, working with a strategic accounting firm can help you maximize cashflow, while strengthening your internal controls and enhancing overall efficiency.
