Accounts Reconciliation Blog

I once worked for a medium sized company that was managed a coffee shop chain. There were only very few employees. There was the marketing division composed of three people, the sales people, the baristas and the finance people. Since our division was right beside the accounting department, I learned a few things about accounts payable payment terms. It was much more complicated than I thought.

I first thought that accounting was a simple procedure. We bought the beans, the napkins, the paper cups and the equipment and we paid them. It turns out that our company like most companies had accounts payable payment terms. The products and supplies were delivered and billed but payments were done much later. I asked the accountant why we couldn’t pay them as soon as they were delivered. She said the finance officer managed the flow of funds in the company, sometimes the company’s funds are made to earn a few interest first before it is used for payment.

Good management of accounts payable contributes positively to cash flow. It also encourages mutually beneficial relationships with suppliers or vendors. Accounts payable best practices can have a significant difference when you get to minimize late payment costs. These include late-payment penalties, interest charges, and lost prompt-payment discounts.

Actions done to accounts payable have a great impact on the trust between a company and its creditors. Whenever a company honors agreed-upon payment terms and pays its bills on time, it helps strengthen the business relationship. A company that has a streamlined accounts payable operation also saves money through the efficient processing of invoices with a minimum of staff and low cost of materials.

Vouchers are accounting documents that represent intent to make payments to external entities such as service providers and vendors. An accounts payable voucher is usually produced after receiving a creditor invoice and the invoice has been successfully matched to a purchase order. The voucher has to contain detailed information regarding the payee, the monetary amount of the payment, a description of the transaction, etc.

In accounts payable systems, there is a process called “payment run”. This is executed to generate payments that correspond to unpaid vouchers. The payments can be released or held at the discretion of an accounts payable supervisor or the company controller.

If you are company that has a low accounts payable in your books of account, it means you are meeting payments to your clients and suppliers a lot faster. Accounts payables are considered liabilities of every company. And accounts payable turnover is the duration of how a liability is being paid. Return of Investment (ROI) are measured when all obligations of the company are paid off.

In an accounting period, an accounts payable turnover measures the company’s efficiency of paying bills. This is measured using the average duration an item remains in accounts payable, equal to total purchases, divided by average accounts payable. A change over time in the accounts payable turnover means your company is paying off its suppliers either faster or slower than you were previously doing.

According to the Small Business Administration a business is considered a small business by the number of employee’s it has or in some cases the gross income.  There is not one answer for all businesses, it differs depending on the market they are in.

Small businesses are the backbone of the US economy says the SBA. Two out of three new jobs come from small businesses and half of the technological innovations. Many small business will not make it past the 2nd year mostly due to poor planning. It is important to have your accounting plan in place with accounts receivable and accounts payable reconciliation knowledge.
The best small business advice is to have at least one year’s worth of income before you start. This means that if it takes $100,000 to start the business and you project that the business can make $100,000 the first year, then you need $200,000 before you start. Don’t start off on the wrong foot, make your business successful.

A lot of people neglected their basic accounting class in high school and college. They probably do this for two reasons: accounting is boring and accounting requires tedious work. Often people thing accounting is unnecessary. Only would be accountants should pay attention in accounting class. If this is your line of thinking, you’re wrong. If you plan to be in any form of business setting someday, you need to pay attention in accounting class. Accounting is vital to business success. If you miss the bus on accounting, like me, there are lots of accounting certification courses you can take. Courses like basic bookkeeping or accounts payable certification courses are plentiful.

Even if you run a big company and have the services of an accountant, you still would need to understand basic accounting. Otherwise, you risk being bypassed or if you owe the business, you risk being stolen from. How do you plan to read and understand the reports your accountant made if you don’t have knowledge about basic accounting? Accounts payable certification courses and basic bookkeeping is designed for professionals from middle management up. It will teach you the basic concepts of accounting.

Accounting work is tedious and time consuming. It also requires lots of paperwork. In order to get paid you need the P.O., sales invoice and delivery receipt. Or if you plan to reimburse something, you’ll need an official receipt. Sometimes though, you can get reimbursed or paid with nothing to show. Take for example per diem or allowance.  Accounts payable allowance or per diem can be paid with little or no paperwork.

Allowances are paid even without a receipt. It is an agreed upon price to cover living expense.  It usually covers food and lodging. For example, your company might have a $100 a day allowance or per diem policy for out of town trips. You have a seminar for 5 days. Your company therefore will release $500. Often no receipts are necessary. It will just be listed as accounts payable allowance and paid outright to you.

Accounting work is tedious and time consuming. In spite of this, accounting work is vital to business success. Like the saying goes, you can’t get from point A to point B if you don’t know where point A is. My point is, in order for your company to run properly and profitably, you must understand all aspects (marketing, sales and accounting) of your business. You, the entrepreneur, don’t have to be a licensed accountant but you do need to understand the basic concepts of accounting. Questions like “what is full cycle accounts payable” and “how to do bank reconciliations” are just some of the accounting jargon you will need to know.

What is full cycle accounts payable? Basically, it is covering all the bases before you pay someone. If your accounts payable list says you owe money to certain supplier and need to pay them soon, you start processing the paperwork for payment. You first check your PO if you really ordered. Next, you check if the item you ordered came to you via the original sales invoice. Check for discrepancies. If all is in place, then you prepare the check for payment. That in essence is full cycle accounts payable.

A sound financial state is the backbone of any business. It is expected that both assets and liabilities are standing on solid grounds. Well-managed accounts payable procedures are focused on increasing assets while a sound credit rating is maintained. These are capable of reducing the total processing costs without additional investment. Increase in profits will therefore follow.

There are different methods you can apply to manage your accounts payable procedures:

~Paper elimination
~Enterprise resource planning
~Take payment discounts
~Purchases should be reviewed constantly
~Encourage suppliers to improve process by submitting electronic invoice
~Ensure smooth process of purchasing by eliminating disputes with suppliers
~Errors should be reduced
~Accounts payable staff should have regular formal training
~Negotiate increase in payment terms

When a company is just starting, it is best if the policies and procedures are laid out. There are methods that need to be followed to ensure that things are done properly. When it comes to the companies payable and receivables, the simplest way to do it is to prepare an accounts receivable and accounts payable flowchart. This way, it will be easier for the employees to follow the policies. This is also a way for employees and managers to review their workflow.

It is relatively easy to do an accounts receivable and account payable flowchart. The flow chart for the accounts receivables and the accounts payable can differ from one company or from one accountant to another. The basics though are generally the same. Accounts payable begins with identifying and organizing your payables and ends with a payment. Accounts receivable begins with identifying sales and receivables and ends with deposit of received payments.