Optimizing Accounts Payable for Small Businesses

Share on facebook
Share on twitter
Share on linkedin
Share on email

There is an age-old mantra when it comes to running a business – Cash is king. And by cash, what we really mean is cash flow management. Especially for small business owners, managing the company’s cash flow is your life-blood as you’d be constantly scrambling for new ways to cut down your expense account as much as possible to stretch out any available budget.

As a fast-growing start-up, you may be thinking about how much money is coming in from investors, where you’re going to channel it to, how you’re getting on with the investor pitch… but hold up! Really start considering if you have enough money to tide from here to there, rather than how much money you can get by then in the future. Consider this: The monthly wages and office rent will not wait until you get paid by your customers or your funding from the investors.

That said, at the heart of cash flow management is the accounts payable process. You want to be well on your way to a healthy cash flow for your business and to do that, we explore some ways to put in place smart management of your accounts payable.

Automate your payments with Spenmo

Why is an account payable important for business?

Accounts payable (AP) are short-term debts due to vendors or suppliers for goods or services that are received and have not yet been paid for. AP appears on the balance sheet under the current liabilities section. Current liabilities are typically less than 1 year.

On the flipside of the vendors and suppliers, they would record the transaction as an increase to their accounts receivable in the same amount.

An increased AP means that the business is buying more goods or services on credit, rather than paying cash. A reduction in AP means that the business is paying off its debts at a faster rate from the prior period than purchasing new items on credit.

Is a high AP always a bad thing? No for two reasons:

  1. Need to look at accounts receivable (cash inflows) that will help with reducing the AP owed.

    • Sometimes, accountants would use cash forecasts to determine future payments and future expected cash receipts.
    • Financial analysts would use ratios for current liabilities and cash or cash equivalents coming in. It’s a bad sign for the business’ cash flows if the ratio is bad.
  2. Depending on the nature of the business.

    • Stage of business life cycle: Businesses at the early growth stage may take up more debts → High capital and asset investment at the start.
    • Businesses in certain industries: Biotechs and IT companies have a long R&D cycle that accumulates a lot of debt before they sell their product.

Accounts Payable vs. Accounts Receivable

 Accounts PayableAccounts Receivable
What is it?Amounts the business owes to its suppliers or vendors for goods or services received on credit.Amounts the business has a right to collect from customers who received goods or services on credit.
What account in the balance sheet/double-entry?Current liability account. Account should have a credit balance (cash out).Current asset account. Account should have a debit balance (cash in).
Who to pay what?Business pays external vendors.Customers pay the business.
Examples
  • Trade payables: Related directly to the company’s core business (e.g. raw materials).
  • Non-trade payables: Not related directly to the company’s core business (e.g. utilities).
  • Taxes payable
  • Loans payables
  • Notes receivable
  • Trades receivable
  • Bad accounts
What’s the difference between accrued expenses vs. accounts payable? And what’s the accrual accounting method? Find out more here >>

What is the accounts payable process?

The account payable process

At this point, we want to share a nifty technique known as the three-way match used to ensure the validity of invoices/bills before they get recorded as a credit to the AP account. 3 documents are matched against one another to highlight any discrepancies in the purchasing process:

  1. Purchase orders (PO) – What was ordered and the unit/total cost of goods or services.
  2. Vendor invoice/bill – What the vendor billed the business.
  3. Receiving report – What the business received. Proof of receipt and delivery of goods or services.
Three way match

Source: SAP Concur

How to organize accounts payable invoices?

Is it necessary for a business to have an Accounts Payable department handle an account in the balance sheet/financial statement? The advent of automation in this function is seeing smaller AP teams. Great news for SMBs! But this is no downer for bigger businesses either who already have an AP department in place. When menial tasks get automated, you free up your hands in your CFO and your team to work on high-value initiatives to scale your financial operations for global growth.

Here are several nifty tips that you can use to organize and structure the team to optimize your AP process, and how you can automate the AP process with Spenmo:

1. Centralize your AP processes.

Consolidate all of your AP functions and documents (e.g. POs, bills/invoices, payment processing and status tracking, etc.) in one place. This also would make it easy for your staff to know where to go to handle invoices.

Don’t wait till month end to get a complete picture of your business expenses! Assign credit cards with pre-assigned budgets to all of your employees & track spending real-time on one platform!

2. Pay bills in batches.

You want to maintain good vendor relationships with your vendors by paying them on time. At the same time, also make it easier for you to track outgoing cheques in your general ledger. Rather than to pay your vendors individually, pay them in weekly batches.

Simply forward your vendor payments to Spenmo- be it 1 or 1000s. Our system scans the invoice and carries out the payment.

Check out some handy tips we have for you when it comes to organizing receipts for small businesses

3. Standardize the purchasing process.

The Spenmo dashboard helps you to standardize an AP system for managing invoices – from when you receive the bill from your vendor to when payment is made. All expenses are reconciled on the dashboard ready to be exported out as an Excel document, or imported into your accounting system.

4. Use an accounting software.

Gone are the days of curling up in front of the computer keying in reams of data on Excel, manually routing invoices for management approval via email and Ctrl + F later on to track the payment status, duplicate or missing invoices, overpayments, account discrepancies… the list goes on.

Get internal submissions, approvals and scheduled payouts all done on 1 platform.

The beauty of using an accounting system lies in getting all invoice data coded accurately and easily accessible anytime before the month end. Plus, e-invoicing with Spenmo feeds data directly to our partnered accounting software.

Learn more about Xero integration with Spenmo >>>



Accounts payables are important when tracking business expenses. AP gives a clear indication of the company finances, unpaid balances which might affect the financial health of the business. Automating your AP with us will minimize human errors and do away with late payments that might earn you late fees to accumulate onto your AP.

 

Stay up to date with Spenmo

Sign up to get the latest news, updates, and special offers delivered directly to your mailbox.

Manage your business payments better, today