Bookkeeping – Accounts Payable Management (Lesson 43)

With small business, the biggest heartache for the bookkeeper is addressing the daily phone calls and letters (bills, statements and notices) related to purchases. Vendors regularly communicate with the accounts payable manager wanting to know payment cycles and status of their respective account. Think of it in reverse of how with receivables communication with the customer is priority; review Lesson 37.

Better business operations have adequate cash and working capital to frequently pay accounts payable, thus reducing the overall stress bookkeepers feel with managing accounts payable. Then there is reality for most small businesses, cash flow has cycles involved. Management of payments requires good planning and attention to the details. Then there is the really difficult situation related to insolvency and how to manage accounts payable. This article explains the first two management processes. The third situation is an advanced subject and is covered in other articles on this website.

Ideal Accounts Payable Management

In more mature operations there is adequate working capital available to process and pay bills regularly. Good operations issue cash disbursements (payments) weekly to vendors and suppliers. The underlying process is contingent on proper approval of bills prior to entry; see Lesson 41 for the authorization process.

Prior to preparing payments, management indicates the total amount available for cash disbursements. Ideally there is more than enough for payments. The following is the best procedure to follow:

Two Days Prior to Mailing Checks

Step I – Pull a detailed list of unpaid bills from the vendor reports. Some vendors may have several bills within their respective account. This list is handed to management for approval of payment.

With modern technology, this list is e-mailed to management; management in turn can pull up the same list in accounting software and open each bill entry and look at the detail from the attached PDF of the bill. For those small businesses not yet at this stage of technology, copies of the bills are attached in order as identified with the master list. Management then authorizes disbursements and/or may exclude certain bills. Be sure to scan the authorization to the electronic folder for the week and month within accounts payable directory.

Step II – Prepare the checks for disbursement using the accounting software’s built-in vendor payments program. Prior to printing checks, ensure all bills authorized for payment are correctly collated and assigned to the current legal name of the vendor/supplier. Once verified, print all checks and collate the bills and checks.

One Day Prior to Mailing Checks

Step III – First thing in the morning leave the batch of checks and bills with the authorized signer of the bank account for management’s signature.

Step IV – Once all checks are signed and returned; collate checks to bill return receipts for mailing. Most checks are three-part, one part is removed for physical attachment to the bills and placed in that vendor’s file. Prior to physical attachment, the original check is scanned with the corresponding bills to two electronic folders. The first directory is the vendor’s folder and the second directory is the batch folder for accounts payable for the respective month and week. If you desire a better understanding of this electronic format, please read the three-part series on processing documents.

Step V – Stuff the envelopes, stamp and set in outgoing mail or the ‘For Pick Up’ pile.

When complete, some vendors want to pick up their checks so a courtesy call is appropriate.

I usually open the bank register to confirm an error free run of checks and to update my mental awareness of the bank balance.

Accounts Payable Management – Cash Flow Issues

The more common scenario is payment of vendor accounts when there are cash flow issues.  Most often it is timing of cash payments against receipts of money related to accounts receivable.  When this is the case, the processing of payments becomes a bit more convoluted.  Often there isn’t enough cash to properly meet all the needs of all the vendors at the same time.  Thus, choices are made of who gets paid and how much.

Some of this can be managed based on deferring until the 30 day deadline approaches. Others are tied to particular projects where draws are issued to the contractor at certain percentage of completion points.  Thus those respective vendors agreed to the deferral until the draw is completed.  No matter the situation, communication with vendors is essential to successful management.

The process of payments is similar to accounts payable management under ideal conditions.  The exception is that management should select who gets paid and who is deferred.  Hopefully management gives emphasis to those vendors that are critical to continued production.

Overall Accounts Payable Management

No matter what, communication is priority with managing accounts payable. Vendor and suppliers don’t like to be ignored. Honesty goes a long way, if the issue is the collection of receivables then state that fact the company is aggressively pursuing collection and upon payment will disburse to vendors/suppliers. If the balance of payables exceeds cash plus receivables and work in process, then it is clear management is unable to generate enough profit in the short-term to address the working capital shortage. Other options must be considered and include:

A) Short Term Line of Credit
B) Long-Term Note
C) Contribution of Capital from the Owners

At this point the business is insolvent and needs to address a very serious situation.

Summary – Accounts Payable Management

Managing accounts payable requires strict adherence to scheduled cash disbursement cycles. Ideally these cycles are weekly and the business has adequate resources to pay all authorized bills. The process of payment requires the signature of management to disburse for particular bills, preparation of checks and signature by the owner. The entire cycle usually takes a couple of days to complete.

In those cash strapped situations, the process is similar except management must select who gets paid and which vendor is deferred. In the more serious cash insolvency situations owners need to focus on long-term solutions. Act on Knowledge.

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