Accounts Reconciliation Blog

When handled properly, accounts payable can provide many ways to improve your company’s cashflow and profit. If you don’t pay attention, you could lose out on earnings and opportunities. Here are a few simple ways to improve accounts payable and use them to your advantage:

~Always double check entries of invoices
~Take the maximum credit terms but pay suppliers on time
~Track purchases and show your suppliers a report of how much business you have done with them to negotiate better terms
~Avoid damaging your credit; complete a credit application prior to doing business
~Always know what you owe, to whom and for how long

There are times when businesses are entitled to a bad debt deduction. In case a customer does not pay your invoice, that bad debt may or may not be deductible depending on several factors. If your business is into selling goods, you can typically deduct the cost of goods you sell but are not paid for as bad debt.

However, before claiming write-offs of accounts payable, the IRS requires that companies take reasonable steps first to collect payment. These include giving the debtor written warnings or enlisting the help of a collection agency or small claims court. A bad debt deduction can only be taken in the year the debt becomes totally worthless.

Measure short term liquidity for goods and services when suppliers only allow short payment periods that are usually within 30-90 business days. Use the Accounts Payable Turnover (APT) ratio to compute the length of time needed for your company to repay your suppliers. The payment period is dependent on factors such as the industry norm, relative size of the supplier to that of the company, and the financial condition of the supplier.

The APT ratio determines the financial stability of a company with good accuracy. A high APT ratio means that the company in question can produce cash fast. If this figure is low, it implies that the company has serious cash flow trouble.

In every business, it is important to reconcile balance sheet accounts at the end of every period as part of the closing process. This could be every month, quarter, or year-end. By doing so, you will be able to identify if there are any errors before closing. You have to do accounts payable reconciliation and accounts receivables reconciliation.
 
The balance sheet account reconciliation is the comparison of the account’s general ledger trial balance with another source. It could be internal like a subledger, or external like a bank statement. Differences in the timing of transactions, such as outstanding checks, are identified as reconciling items.

Payables professionals know that there is an ongoing evolution of the AP department. Thus, they need to be updated on financial trends and be in constant training and re-training. In fact, much of the AP work done today has only been developed in the last two to five years.
Get an accounts payable certification to be at par with, or better than, your colleagues. As an AP professional, you are expected to:
 
~control costs by using the latest electronic processing technologies
~work intuitively with every system and department within your organization
~comply with the requirements of the Sarbanes-Oxley Act, Section 404

The accounting business has a lot of jargon. People who plan on, or are already, running a business needs to know the definitions of key terms and circumstances that they should watch closely. For instance, you have to know what are accounts payable.
 
This term represents money owed by the company to suppliers who provide it with goods and services on credit. Normally, the amounts are due within the current accounting period and which are generally not longer than one year. An efficient accounting system must have an accounts payable ledger where you can enter a detailed listing of amounts owed by your business to its creditors.

When a company estimates that there is a high enough risk that certain accounts receivable may not paid or collected from customers, they are labeled as doubtful accounts. An accounts payable allowance for doubtful accounts represents the estimated total amount of accounts receivable that are considered doubtful. This process of approximating and forecasting doubtful accounts is an early-warning system for possible future bad debts.

Bad debts are those former doubtful accounts receivable that are now treated as having little or no prospects for collection. When bad debts are written off, they are removed from both the accounts payable allowance for doubtful accounts and the accounts receivable listing.

Track all your purchases and outgoing expenditures to vendors. With an accounts payable flowchart, you can set up the following:

~vendor groups and vendors
~posting profiles and various payment options
~parameters concerning vendors and purchase orders
~prices, discounts and charges
~supplementary items and promissory notes
~deliveries and destinations, etc.
Depending on your setup, you can then more easily perform the many tasks that are related to your vendors and purchases.

Increase your business performance by shaping up your accounting department. Learn to negotiate accounts payable payment terms with your creditors. Here are two sound suggestions from accounting experts:

*Negotiate your payment terms based on the receipt of goods or invoice. This can add one week or more to your terms which can be 25% of 30 day terms. Maximize your payables terms and minimize the impact to your credit by utilizing electronic funds transfer for just-in-time payments.

*Take payment discounts. For instance, if you are getting 2%/10 net 30 terms, take it. This means you will be given a 2% discount if you pay within 10 days instead of the normal 30 day terms. This would translate into an 18% return on your capital which is already a good return on your investment.

A big organization or company that processes large sums in monthly payables must have an efficient accounting system. Learn to implement sound accounts payable procedures to increase your use of payables and discounts, improve your payables cycle efficiency, and tie it to your purchasing and receivable cycles.

Some of the modifications you can implement:

~Utilize paperless invoices, centralized vendor files, automated workflows and web-based supplier self-servicing
~Negotiate payment terms based on the receipt of goods or the invoice
~Make reviewing purchases a continuous process so as to monitor changes in transportation charges, new prices and products, payments terms, etc.
~Review purchasing procedures to eliminate disputes later so you will not be forced to pay for your mistakes
~Provide accounting staff with regular formal training to improve effectiveness