Accounts payable: what you need to know

Whether you’re a small business owner or an aspiring accountant, a solid understanding of accounts payable can help you manage your cash flow, build positive relationships with your vendors, and keep your business more financially stable. In this beginner’s guide, we break down what accounts payable means, the processes you can use to manage them, and even how to forecast them to optimise your cash flow.

Accounts payable: meaning and application

Let’s start with the definitions.

What is accounts payable?

The term is used in a couple of different ways in the business world. Accounts payable is both:

• The money your business owes for the services or goods you’ve received
• The subsection of an accounting department that makes sure that bills and invoices are paid on time (essentially managing the company’s short-term finances).

We’ll focus on the first definition in this post.

What’s an example of an account payable?

Every business has expenses, and accounts payable is simply a list you keep of those expenses so you can make sure that they’re not overlooked. Common accounts payable include:

• Energy, phone, and internet bills for your office or warehouse space
• Insurance payments, for example, business insurance and commercial vehicle insurance
• Office supplies to stock your stationery cupboard
• Raw materials you order for your manufacturing business
• Equipment leases, for example, for vehicles or machinery
• IT support services or software subscriptions, for example, an annual fee for your CRM or project management software
• Costs for maintenance, repairs, cleaning, or even landscaping
• Fees for courier or logistics services.

All of these are liabilities for your business, and you’ll need a system to make sure that they’re settled on time and in full.

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How to manage accounts payable

It’s really important to stay on top of your accounts payable as a business owner or an accountant. If you delay paying what you owe, you can end up paying late fees, and you can also damage the relationships you have with your suppliers.

You can manage accounts payable manually. For example, many smaller companies or sole traders track their incoming invoices in a spreadsheet. They note when the bill is paid, and then store a copy of the bill and the payment confirmation together in an accounting folder.

It’s worth noting that your file storage system is as important to your process as ensuring that funds are transferred to your suppliers. It means you’ll be able to find the files you need again when you come to do your year-end accounts.

You can also use accounting software to track your accounts payable to automate some aspects of the process.

Ideally – especially if you’re part of a larger company – you should build an accounts payable system that includes more than one person for each invoice you receive. For example, one person could prepare the account, check it against a purchase order and the invoice criteria, and then pass it to a second accountant for the transfer. This safeguard can minimise human error and add accountability to your process.

Accounts payable process examples

Even if you’re taking care of your company’s accounts alone, you can build an effective accounts payable system. The right workflow helps you spot mistakes, ensure your debts are settled on time, and spot the patterns that can help you optimize your cash flow.

For example, take a look at this example of a multi-stage accounts payable process:

1. You receive an invoice, by email, from the company you’re working with.
2. You verify the invoice. This involves checking the name, address, and date to verify that it’s really from the company. You’ll also check that the invoice hasn’t accidentally been duplicated, so you don’t pay twice.
3. You check the invoice against your internal criteria. For example, your company might need the invoice to include the name of the person at your company who’s acted as your vendor’s main contact, or you might have issued a PO (purchase order) number that also needs to be included.
4. You route the invoice for approval and payment processing. In larger accounts departments, this is usually where a colleague will come in and provide a second pair of eyes.
5. You make the payment, complying with the vendor’s payment terms.
6. You record the payment and update your files.

This system protects your company’s finances and helps you stay on top of what you owe. Plus, when you handle all of your accounts payable in the same way, you’ll build a bank of data that can help you spot patterns and get an idea of what your liabilities will look like in the next quarter or the next financial year.

How do you forecast accounts payable?

Forecasting accounts payable means predicting your future bills and managing your cash flow so you have the funds available to pay them when they land in your accounting intray.

If you want to forecast more accurately, note and track your regular expenses (and the vendor’s payment terms) so you know when to expect bills or invoices. You can also look at your company’s financial records to spot patterns that can tell you when you’ll need to have more cash in your accounts. For example, you might notice that several big orders or annual expenses tend to fall in the same quarter.  When you have this information, you can plan to make the funds available when you need them, avoid late fees, and stay on top of payments.

It’s worth noting that some businesses use accounting software (rather than spreadsheets alone) to help them forecast their accounts payable as well as simply track invoices as they arrive. If you’re interested in a more detailed overview, look for a tool that can report on your past performance, as well as simply centralising your accounts payable files.

Frequently asked questions

When to use accounts payable?

If you use services or accept deliveries, and you’re invoiced so you can pay after you’ve received those goods or services, your business has accounts payable. Even sole traders in creative industries, who might not need to consider the cost of raw materials or equipment hire in the same way as a construction or joinery business, for instance, will have accounts payable:

• A monthly fee for the coworking space they choose to work in
• An annual fee for the professional membership of their video conferencing software
• Costs for advertising, for example, for printing business cards or flyers or creating a sign for their door.

If these are not paid by direct debit, they’re considered accounts payable, and you’ll need to find a way to stay on top of them.

What’s an accounts payable role?

We mentioned that accounts payable can be a department that manages this subsection of a company’s finances. If a company is large enough, this team can include several different roles, like data entry and database management specialists, payment processing staff, vendor relationship managers, and specialists in dealing with disputes and failed payments. There may also be a person in the accounts payable team who manages internal reimbursements like employee expenses and petty cash.

What’s the difference between accounts payable and accounts receivable?

If accounts payable tracks the money you owe to your vendors, accounts receivable manages the money that’s owed to you for the goods and services you’ve provided. In larger companies, the term can also refer to the department that manages those incoming funds and makes sure that your invoices are paid.

What does accounts payable mean? Quick summary

Generally speaking, a business’ accounts payable cover all the expenses it’s incurred but not yet paid. If your business has suppliers, it’s important to have a robust system to manage the accounts payable – for example, tracking invoices as you receive them and noting when and how they’re paid.

When you have that system in place, you’ll be able to forecast your finances and improve relationships with the other businesses you work with – and you’ll find your end-of-year accounting much smoother too.

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