Accounts payable: Optimizing for better vendor relations

Just as with your personal relationships, its easier to treat people or things properly than to repair something that’s broken. Managing your accounts payable (AP) goes a lot like this, especially as an early stage startup or founder only just beginning to build a rapport and a reputable brand. 

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When don't have a solid handle on accounts payable, your vendor relations suffer along with your cash flow. Missed or late payments result in costly delays for your business, loss of revenue, and even loss of future business. Errors, miscalculations, and general lack of comprehension around AP can pile up and create massive financial problems for your startup.

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To combat these problems many founders turn to automation and accounting software for support. Combining a deep understanding of your accounts payable and automating the vendor payment process is the best step a founder can take to handle their finances. 

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What are Accounts Payable?

Accounts payable means money owed to long-term loans or anyone who provided you a good or service in advance of payment. An easy way to think of AP is one company handing another company an IOU. The vendor delivered, but you still need to settle the bill.

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Accounts in AP are considered liabilities, meaning you have a debt you must pay by a certain due date.

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You may also see AP liabilities categorized as:

• Trades Payable – The amount of money owed to vendors or suppliers for inventory items specifically. 

• Credit Card Balances – Any amount owed on credit cards, regardless of what was purchased.

Why is understanding Accounts Payable important?

Your AP is a factor of your startup’s finances you should actively monitor and use it to your advantage. Alongside tracking money owed, an accurate AP ledger offers founders a host of benefits to better help them manage their finances.

Debt management

On your ledger, you’ll see a number of dates related to received invoices – date received, payment due date, and date of payment made (once complete). This tracking system helps you monitor and ensure you make payments fully and on time. Like most data entry, you’ll manually input the necessary information unless you’re using AP or accounting software.

Tax compliance

Proper AP recording and tracking ensures you submit the correct numbers to avoid delays or audits come tax time. Incorrect filing can also lead to fees or fines.

Debt tracking

Another benefit to AP is that it gives you clear view of your startup’s debt. A continuous monthly rise in AP shows your startup is purchasing more items on credit vs. cash. 

Net worth

Founders and investors can look at AP on your balance sheet for an understanding of your startup’s net worth or amount of equity. You can find that using this equation:

           Assets - liabilities = equity

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As previously mentioned, AP falls under liabilities. Your net worth won't be accurate if you don’t know how to manage accounts payable effectively. Inaccurate reporting can negatively affect potential investor interest or cause problems with budget forecasting and projections. 

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Understanding Accounts Payable vs Accounts Receivable

Accounts payable represents the money your company owes to its vendors, suppliers, and providers of goods and services. On the other hand, accounts receivable (AR) is the money customers or clients owe to you for goods and services provided.

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While you record both AP and AR in your general ledger they are both recorded differently. AR is noted as an asset because it is money you are expecting to come in within a specific timeline. Again, AP appears on your ledger as a liability because it is a debt you must pay by a certain due date. 

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In short, AP and AR balance each other out. They’re critical pieces of your financial standing since they are one way of showing how efficiently your business handles cash out vs. cash in.  By tracking them, you can ensure that suppliers receive payments on time and that customers pay for services rendered promptly. Additionally, it allows for more efficient reporting on profits and losses, reduces audit risk, and helps you understand the financial health of your business.

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What are Accounts Payable examples?

To better understand accounts payable, let's look at some examples:

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• Example #1: Let’s say you purchase $2,000 worth of branded company t-shirts to have on stock to gift to new employees. Instead of paying $2,000 upfront, the t-shirt vendor gets to work right away on processing your order and sends you an invoice once the order ships. You or your bookkeeper will record the invoice when it arrives in your AP ledger by the proper payment terms. You then know that you need to pay your t-shirt vendor by a specific date. 

• Example #2: Another example is travel purchased on a credit card. Two months ago, youand your co-founder traveled across the country to meet with a possible investor. You purchased the plane tickets, hotel, car rental, and food on a corporate credit card. The amount owed on that credit card is now an account under AP. 

• Example #3: Another standard accounts payable example is taxes. Payroll taxes, director's fees, and unemployment taxes you pay to applicable authorities qualify as AP. In addition, any debts included in loans or borrowing arrangements, such as overdrafts, asset financing, and invoice discounts, will also show up on your balance sheet.

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All in all, these examples of accounts payable demonstrate the variety of forms AP can take.

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Where do I find Accounts Payable on my financial statements?

Accounts payables lives in your startup’s general ledger but also appears under the liabilities section of your company's balance sheet. Accounts payable may also appear on your income statement or cash flow statement if there is a change in the total amount of liabilities owed.

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The balance sheet totals the amount owed in the AP account to give you a complete picture of your cash out. If you have an expense that occurs bi-annually, it will appear in the total amount owed the month it's due. That way, total AP costs for each month remain accurate.

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What is the typical Accounts Payable process?

The accounts payable process follows this sequence:

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1. Invoice Received – A vendor sends you an invoice for goods or services purchased.

2. Invoice Entry – Enter all vendor information and payment schedule or terms into your company’s accounting system. This is either done manually or through AI automation with the right software.

3. Invoice Approval – Once you enter the invoice into the system, the payment goes through an internal approval process. This typically involves a signature from someone with authority to approve charges within the company, like a founder or CFO.

4. Payment – Once approved, you either pay the invoice immediately or schedule out a preferred payment date. Payments are typically made through ACH options. 

5. Mark Invoice Paid – Once the vendor receives the payment, your bookkeeper or accounting software will mark the invoice as "paid" in the company's ledger. 

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Depending on your startup's structure, you can automate or streamline specific steps in this process. If you’re dependent on manual entry, consider accounting software to lighten the burden and reduce errors. Doing so helps to ensure that your company stays on top of its accounts payable and avoids costly late fees or penalties.

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Improving the process: Accounts Payable best practices for startups

As a startup, optimizing your accounts payable processes to manage cash flow, keep vendors happy, and maintain financial accuracy is crucial.

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To ensure you have an efficient accounts payable system, you should take advantage of several best practices. Start by establishing policies and procedures, so everyone in the organization knows what to expect and when vendors across departments will receive payments.

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The following are some additional best practices for startups to consider when managing accounts payable:

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1. Automate your Accounts Payable process

By using accounting software or an automated accounts payable system, you can save time and resources when managing your accounts payable. Automating the process allows you to quickly enter invoices into the system and approve payments without manually managing each transaction.

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2. Set up a payment schedule

Setting up a payment schedule creates a consistent, dependable method to keep your payments on time. Payment schedules look different for each contract; due dates are dependent on the terms of each vendor's invoices.  

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For example, if a vendor requires payment within 30 days of receiving an invoice, you should make a payment before the 30-day mark (also known as Net-30).

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3. Create a reminder system

Reminders are essential to ensure your startup makes payments on time. Create a reminder system that alerts team members to send payments. You could accomplish this through emails, company messaging channels, or calendar reminders.

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4. Establish a credit system

Consider establishing a credit system if you’re working with vendors who require payments in advance. A good credit rating allows you to make larger purchases from vendors and helps ensure that your company can meet its payment obligations on time.

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5. Monitor payment performance

Monitoring your payment performance regularly is essential. Doing this allows you to spot any missed payments or overpayments. Multiple missed payments strain vendor relationships and can eventually lead to rescinded contracts. 

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6. Review your Accounts Payable process regularly

Consistent monitoring helps identify areas for improvement and keeps your system current with your growing team. Doing so helps you identify areas for improvement and keeps your system current with ever-changing laws and regulations.

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7. Prioritize Accounts Payable

Finally, accounts payable must be a priority for your startup. Maintaining good relationships with your vendors requires accurate invoices and timely payments. If you don't prioritize accounts payable, you could damage your reputation and negatively impact your business.

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On-time payments positively affect your startup’s cash flow and demonstrate that you are reliable to vendors. Your credit and reputation benefit from reoccurring, on-time payments.

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Accounts payable can be a complicated process. However, with the right tools and procedures, you can manage it efficiently and effectively. 

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How to record Accounts Payable

When recording accounts payable, it is crucial to correctly enter each invoice into the general ledger – due date, the amount owed, and any discounts or credits. If you’re using double-entry bookkeeping, you debit the asset or expense in the expenses column and credit the liability account in the AP column. 

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The amounts recorded in the accounting records must also match the amount owed on the vendor's invoice. Under GAAP accounting laws, the amounts recorded and invoice amounts must match. If there is a difference, investigate and resolve the discrepancy as soon as possible. 

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Vital AP Metrics to track

There are key accounts payable metrics to track to ensure that your startup operates as efficiently and effectively as possible. This helps you maximize efficiency and saves you money in the long run.

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Some of the key metrics to analyze include:

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• Number of invoices received – Tracking invoices received guarantees that you pay all of your vendors on time and spot errors if the number of invoices doesn’t match the sub-ledger. 

• Cost per invoice – Knowing how much each invoice costs helps you to budget for upcoming payments.

• Number of processed invoices – Tracking the number of invoices processed helps you identify and address any bottlenecks in the system.

• Average days to pay invoices – Knowing how long it takes to pay each invoice helps you plan your cash flow more effectively.

• Percentage of invoices paid on time – Tracking the percentage of invoices paid on time provides an up-to-date snapshot of your AP’s efficiency. 

• Days payable outstanding (DPO) – DPO is the average number of days it takes for your company to pay its invoices. This data can help you identify any issues with your current system if there is a substantial processing delay. .

• Error rate – Identifying and addressing accounts payable errors is vital to maintaining accurate records and preventing unnecessary costs or penalties. For example, you can track the percentage of invoices with incorrect coding or incorrect amounts.

• Various payment types – Tracking the types of payments helps you identify areas where you can reduce or streamline expenses. Checks can take longer to process, so monitoring the number of checks helps you identify ways to speed up your accounts payable process.

Benefits of automating Accounts Payable

Automating accounts payable streamlines the process and reduces costs. You can avoid manual errors by digitizing specific tasks, such as invoice recording, payments, and reconciliations. Software speeds up workflows and automates daily tasks, too – no manually entering vendor bank accounts, hunting down people for approvals, or setting reminders for payments dates. This level of vendor payment automation is vital to maintaining vendor relationships. 

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Here is the power of accounts payable automation:

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• Quick invoicing – Automated software allows you to upload an invoice and create a bill instantly. Each bill is recorded and stored upon creation as well. 

• Vendor management – Automation software helps you keep track and organize all of your vendors in a single place based on classes and categories. It ensures that you pay vendors on time and that you adhere to the terms of the agreement.

• Scheduled payments – Schedule bills per your preferences. If you get invoices early enough, you can schedule a month’s obligations ahead of time. 

• Workflow automation – Implement specific regulations and approvals in your bill pay process. If your bills need to be approved by multiple people, you can set up an automatic route for every bill to take. 

• Provide better insights into the system's performance – Allows companies to spot potential issues before they become significant problems.

• Maintain accurate records – Automation records all transactions accurately and catches errors in the moment. With proper records, you can avoid overpaying or missing payments entirely. 

• Improve cash flow – Early-stage startups incur a lot of costs and loans to fund production. Catching increasing AP totals allows you to pivot budgets before you end up in hot water.

• Free up needed resources – Founders spend a ton of time doing their bookkeeping. Automation gives you back your time to focus on other aspects of your growing startup. 

• Improve your overall financial management – Founders have a tangible snapshot of their cash out and how it compares to their cash in throughout the month. You can adjust budgets by utilizing AP and AR together. A healthy AP amount is equal or lower than your AR.  

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Do founders need to monitor Accounts Payable regularly?

Accounts payable is an integral part of managing finances. You can’t make informed decisions on budgets and new purchases if you're not watching your debt. 

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Don’t risk your startup by mismanaging your accounts payable. Construct and implement an efficient AP process and establish a routine for whoever is running your AP. If you’re worried about AP management eating up time, look into accounting or AP software to streamline the process. 

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Make AP your partner in tackling financial issues and prepping your startup’s growth.