Accounts Payable Best Practices: When to Cut Corners
By Patrick Bonnaure, ProLedge founder.
Every small business has bills to pay, but the process to go about it can vary greatly from one company to another. Small businesses typically follow one of 5 approaches:
- Pay the bills as they come in
- Sit on the bill as long as necessary and then cut a check
- Cut the check as the bills come in, but hold onto the checks for awhile before mailing them
- Use the Accounts Payable module in QuickBooks to enter bills and decide when to pay them.
- Use web based applications to manage Accounts Payable and the approval workflows.
Each option has it pros and cons, and some businesses end up using a hybrid of these five techniques. The factors to consider are the following:
- Cash flow. Do you want or need to stretch your payables?
- Are you filing taxes on a cash basis or accrual basis?
- How many bills do you have per month?
- How large are some of the bills in proportion to your revenue?
- Is there more than one person who has approval rights to pay bills?
There are a few rules of thumb to use:
- Paying you bills just before the due date is generally a good thing. Paying too soon increases your need for working capital. Paying too late tends to generate penalties and strain relationships with your vendors.
For efficiency sake, you should touch your bills as few times as possible. The “proper” way to manage a bill is to enter it in QuickBooks as an accounts payable and go back into QuickBooks later when it’s time to pay for it. However, if we’re talking about a small bill, this two-step approach is overkill and takes more time than it’s worth. You might have been better off paying the bill right away, as soon as you got it, and not have to worry about it anymore.
- If you file your taxes on an accrual basis and you don’t pay your bills as soon as you get them, you don’t have much choice; you have to record the bill as an accounts payable when you receive the bill (it needs to show as a liability on your balance sheet, until you pay it). Luckily, most small businesses file on a cash basis and this issue is moot unless the business owner still wants to have an accurate picture is her books on an accrual basis.
- The more bills you receive, the wiser it is to use to use QuickBooks or another tool to track your accounts payable. If you have 10 bills per month, don’t sweat it. Pay the small ones as they come in and for the large ones, delay the mailing. Some of our smaller clients use a very efficient solution: they cut the check as soon as they receive the bill. They sign the check, stuff it into an envelope and then put a post-it on the envelope saying when the check should be mailed and what the amount is. The envelope then sits on their desk until it’s time to mail it. They essentially manage their A/P by having a stack of envelopes ready to be sent and choosing which ones to mail and which ones to hold onto. This technique is of course good enough only if you have very few bills and you should apply this technique only to your largest bills, or you’ll end up swimming in a stack of envelopes ready to be mailed.
- If you have a large number of bills to pay, there is no way around, and you have to use QuickBooks or another web based tool to manage your AP.
- If you have more than one person who needs to approve bills, you need to start using web-based workflows, such the ones offered by Bill.com.
All this, of course, begs the question of how can an outsourced bookkeeping service like ProLedge can support its clients with Accounts Payable. Please check this separate bog for some answers to this question.
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