Many businesses deal with suppliers, contractors, and other third parties regularly. Often, these businesses need to make payments to these third parties for goods or services rendered. These types of payments are called accounts payable.

If your business deals with accounts payable, it’s crucial to understand how the process works and what you need to do to ensure timely and accurate payments. In this article, we’ll cover everything you need to know about accounts payable and why it is a significant part of your business.

What Is Accounts Payable?

Accounts payable (AP) is the process of making payments to suppliers, contractors, and other third parties for goods or services rendered. An accounts payable transaction is created when a business agrees to purchase goods or services from a third party. This transaction represents an obligation of the business to make a payment to the supplier. According to a study over two-thirds of businesses manually key invoices into their ERP or Accounting software, whilst 56% of respondents in the research stated that they spend over ten hours a week processing invoices and supplier payments.

68% of businesses key in invoices manually. 56% spend over ten hours a week processing invoices and supplier payments.

When a business purchases goods or services from a supplier, it usually needs to pay for them within a certain period of time. This timeframe is called the payment terms. The payment terms will vary depending on the supplier and the type of goods or services purchased. For example, some suppliers may require payment within 30 days, while others may give the business up to 60 days to pay.

Once the payment terms have been met, the supplier will send an invoice to the business for the amount owed. The invoice will include information such as the date of purchase, the due date, and the total amount owed.

The business will then need to pay the supplier by the due date. The supplier may charge interest on the outstanding balance if the business does not pay by the due date.

Examples of accounts payable include payment for office supplies, rent, utilities, and inventory.

The Accounts Payable Process

The accounts payable process typically involves the following steps:

  1. Purchase order: The first step in the accounts payable process is creating a purchase order (PO). A PO is a document that specifies the goods or services to be purchased from a supplier, as well as the price and delivery terms.
  2. Invoice: Once the goods or services have been delivered, the supplier will send an invoice to the business. The invoice will include the cost of the goods or services and any applicable taxes.
  3. Accounts payable: The business will record the invoice in its accounts payable system. This system is used to track all outstanding obligations to suppliers.
  4. Payment: The business will pay the supplier, typically by check or electronic transfer. The payment will be processed according to the purchase order or invoice terms.
  5. Accounts receivable: Once the supplier has received payment, they will update their records accordingly and notify the business that the account has been paid in full.

Why Is Accounts Payable Important for Businesses?

Accounts payable is a crucial aspect of business because it helps companies manage their cash flow. When a business makes a purchase, the supplier often requires payment within a certain period of time. If the business does not have the cash to make the payment, it may need to take out a loan or use credit to pay the supplier.

Paying suppliers on time can help businesses build strong relationships with them. Suppliers are more likely to offer discounts or extended payment terms to businesses that pay their invoices on time. These discounts can help businesses save money on future purchases.

Additionally, paying suppliers on time can help businesses avoid late payment fees. Many suppliers charge late payment fees if invoices are not paid within the agreed-upon timeframe. These fees can add up and impact a business’s bottom line.

How Are Accounts Payable Tracked?

Accounts payable can often be complex and time-consuming, particularly for businesses with many suppliers. To properly track accounts payable, businesses need an accounting system that can accurately record and track AP transactions.

In companies with low invoice volume, 33% paid on time when using automated systems vs. the 24% that paid on time without automation.

For companies with low invoice volume, 33% paid on time when using automated systems versus the 24% that paid on time without automation. The same pattern held in businesses with moderate invoice volume: 42% of PO invoices were paid on time when automated, and 25% were when not automated.

There are a few different methods that businesses can use to track AP:

  • Manual tracking: This method involves manually recording AP transactions in a ledger or spreadsheet. This option is often used by small businesses with few suppliers.
  • Accounting software: This method uses accounting software to track AP transactions. This option is used by businesses of all sizes as it can provide more features and flexibility than manual tracking methods.
  • ERP systems: This method involves using an enterprise resource planning (ERP) system to track AP transactions. ERP systems are typically used by large businesses with complex AP processes.

It is common for small businesses to track their accounts payable monthly, but businesses with complex AP needs may need to track their accounts payable weekly or even daily.

What to Look For in Accounts Payable Software

There are many different types of software available to help businesses with their accounts payable needs. When choosing an accounts payable solution for your business, it’s important to consider your specific needs and requirements.

Some things you may want to look for in an accounts payable solution include:

1. Ease of use

The software should be easy to use and understand. It should have a user-friendly interface that makes it easy to input data and generate reports.

2. Flexibility

The software should be flexible enough to handle your specific business needs. It should be able to interface with other systems, such as your accounting software.

3. Automation

The software should offer features that automate the accounts payable process. This can save you time and money by reducing manual data entry and increasing accuracy.

4. Reporting

The software should provide detailed reports that give you visibility into your accounts payable process. These reports can help you identify trends and areas for improvement.

5. Pricing

The software should be priced competitively. Be sure to compare features and pricing before making a final decision.

6. Security

This should be a top concern when choosing any software for your business. Make sure the software you choose has robust security features to protect your data.

Conclusion

Accounts payable is a crucial process for businesses that work with suppliers, contractors, and third parties. Understanding accounts payable and its importance can help businesses manage their cash flow and avoid late payment fees. It also guides them on how to choose the proper accounts payable software for their needs.