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.

Value Investing

Do you want to learn how to get returns like this?

Then learn about Value Investing. Value investing in the simplest of terms means to buy low and sell high. Value investing is defined as a systematic process of buying high quality stock at an undervalued market price quantified by intrinsic value and justified via financial analysis; then selling the stock in a timely manner upon market price recovery.

There are four key principles used with value investing. Each is required. They are:

  1. Risk Reduction – Buy only high quality stocks;
  2. Intrinsic Value – The underlying assets and operations are of good quality and performance;
  3. Financial Analysis – Use core financial information, business ratios and key performance indicators to create a high level of confidence that recovery is just a matter of time;
  4. Patience – Allow time to work for the investor.

If you are interested in learning more, go to the Membership Program page under Value Investing section in the header above. 

Join the value investing club and learn about value investing and how you can easily acquire similar results with your investment fund. Upon joining, you’ll receive the book Value Investing with Business Ratios, a reference guide used with all the decision models you build. Each member goes through three distinct phases:

  1. Education – Introduction to value investing along with terminology used are explained. Key principles of value investing are covered via a series of lessons and tutorials.
  2. Development – Members are taught how pools of investments are developed by first learning about financial metrics and how to read financial statements. The member then uses existing models to grasp the core understanding of developing buy/sell triggers for high quality stocks.
  3. Sophistication – Most members reach this phase of understanding after about six months. Many members create their own pools of investments and share with others their knowledge. Members are introduced to more sophisticated types of investments and how to use them to reduce risk and improve, via leverage, overall returns for their value investment pools.

Each week, you receive an e-mail with a full update on the pools. Follow along as the Investment Fund grows. Start investing with confidence from what you learn. Create your own fund and over time, accumulate wealth. Joining entitles you to the following:

  • Lessons about value investing and the principles involved;
  • Free webinars from the author following up the lessons;
  • Charts, graphs, tutorials, templates and resources to use when you create your own pool;
  • Access to existing pools and their respective data models along with buy/sell triggers;
  • Follow along with the investment fund and its weekly updates;
  • White papers addressing financial principles and proper interpretation methods; AND
  • Some simple good advice.

Value Investment Club

Please Signup
Username can not be left blank.
Please enter valid data.
This username is already registered, please choose another one.
This username is invalid. Please enter a valid username.
First Name
First Name can not be left blank.
Please enter valid data.
This first name is invalid. Please enter a valid first name.
Last Name
Last Name can not be left blank.
Please enter valid data.
This last name is invalid. Please enter a valid last name.
Website (URL)
Website (URL) can not be left blank.
Invalid URL
Invalid URL
Email Address
Email Address can not be left blank.
Please enter valid email address.
Please enter valid email address.
This email is already registered, please choose another one.
Password can not be left blank.
Please enter valid data.
Please enter at least 6 characters.
    Strength: Very Weak
    Select Your Payment Gateway
    How you want to pay?
    Payment Summary

    Your currently selected plan : , Plan Amount :
    , Final Payable Amount:
    error: Content is protected !!