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Salt Lake City Bookkeeping Blog

Accounts Payable Practices That Actually Save Money

Posted by Leanne Armstrong on Oct 10, 2018 9:00:00 AM

Accounts Payable Practices That Actually Save MoneyMoney moves in and out of every small business, so managing cash flow is essential. You may not be able to avoid the expense side of the cash flow equation, but following a solid accounts payable process will keep business costs under control and may even save you some money. Let’s look at a few proven ways to plug potential holes in your accounts payable practices.

Resist the Urge to Delay Bill Payments

A recent study by Sage found that 1 in 10 invoices across the globe are paid late, costing small and mid-sized businesses as much as $3 trillion annually! While it can sometimes be tempting to delay paying bills – especially when business is slow - this practice could cost your company more in the long run.

Many vendors maintain a strict policy of charging late fees and interest penalties. So rather than resolving cash flow issues, late payments often compound them. Mismanaging your payables can also damage your credit rating and threaten crucial supplier relations. Delinquent accounts may force sellers to:

  • demand payment upfront,
  • deny future order requests, and
  • forward unpaid accounts to a collection agency

Using a software system like QuickBooks allows your business to generate regular accounts payable aging summary reports. These summaries show you which bills are outstanding (and by how many days), and which invoices have yet to come due. Use these reports to keep your payment schedule organized and avoid the costs of late payments and lost credit privileges.

Don’t Use Early Payments as an Organizational Tool

Some business owners pay their invoices on receipt as a means to avoid losing or forgetting to pay them. It’s true that that early payment practices prevent late fees, but they can also lead to less than ideal circumstances should your business be hit with an unplanned expense.

The problem with many cash crunch emergencies is that they’re unexpected, so your cash flow strategy should include a contingency fund. But if you consistently dip into that fund to pay invoices early, emergency reserves may not be there when you need them.

To dodge the costs of having to borrow against a charge card or line of credit, set up your accounts payable system to pay bills when they’re due.

Not All Early Payments Are Created Equal …

Don’t confuse paying bills early for organizational reasons with the opportunity to reap a sales discount! One common early payment discount offered by some suppliers is 2/10, Net 30, which means that:

  • if you pay the relevant invoice within 10 days of issue, you can deduct 2% from the total amount owing, but
  • if you choose not to take advantage of the early payment incentive, the full invoice amount “Net of any discount” is due within 30 days

Let’s say you've received an invoice for $5,000. The payment terms are 2/10, Net 30 and the invoice is dated September 1. Your business can either pay the full $5,000 by October 1, or $4,900 by September 10 ($5,000 x 2% = $100 / $5,000 - $100 = $4,900).

Your cash flow situation will play a key role in any discount decisions you make. Can your business afford to make this payment 20 days in advance? Or are your cash reserves such at the moment that saving $100 won’t justify leaving your operation vulnerable to an unplanned expense?  

Make Sure You Only Pay Once

Shelling out for business expenses can be painful enough the first time without mistakenly paying the same invoice twice. To help prevent this, get in the habit of making payment from original invoices only, rather than from a supplier’s statement of account.

Statements can be a useful tool for identifying which bills you’ve received and which payments you’ve made, but paying outstanding amounts directly from them:

  • prevents you from verifying order quantities and prices,
  • won’t provide a valid source document for any taxes charged, and
  • increases the chances of duplicating payment when the original invoice eventually arrives

Instead, request copies of missing invoices, enter them in your accounting system, and pay them accordingly.

Automated programs are typically designed to alert users when a duplicate invoice number is entered. So to further avoid multiple payments, make sure you enter an invoice number with every bill that you process. While most companies assign unique numbers to their invoices, you should have a logical and consistent policy for creating a number when one doesn’t exist.

One example would be to always use the first three letters of the vendor’s name, in conjunction with the date of the invoice. So a request for payment from ABC Company dated September 10, 2018 might get entered into your accounting system as ABC091018.

 


 

Topics: Accounts Payable, paying bills, Cash Flow