Establishing a consistent accounts payable process for your vendors and bills is absolutely essential. Once this is done, dealing with vendors and bills can go smoothly. Here are ten tips to help establish this important process:
1. Purchase accounting software with an accounts payable module, such as QuickBooks. I’ve read in several places online that up to one-half of micro businesses (defined as under ten employees) do not use business finance software. It may seem hard to believe in today’s computerized business world, but it seems to be true.
If you are one of those who is still using Excel or paper ledgers instead of a program like QuickBooks, the advantages of using business finance software are tremendous, and far outweigh the cost and learning curve. When used correctly and consistently, the software will serve you in several important ways:
- It will remind you when bill payments are due. We all know it’s not good to pay bills late, but it’s also not good to pay them too early – this can unnecessarily impair your cash flow. It’s easy to manage bill payments and cash flow when QuickBooks is used.
- QuickBooks can actually generate payments to your vendors in an electronic way. This makes the payment process a single step. More on that below.
- Once bills are marked as Paid, these payments are recorded into the checking register (or whichever account was chosen as the bill payment account.) This helps to keep register balances accurate.
2. Utilize your vendor’s auto-debit or auto-charge feature, if available. Utility companies, and other types of companies who have recurring payments, often offer auto-debit or auto-charge services. When you sign up for this service, the amount due is automatically deducted from the business checking account, or charged to the business credit card, on the date shown on the invoice. Often, the paper invoice is still mailed ahead of time, but sometimes the vendor insists on emailing invoices instead. Either way, the invoice is available for viewing before the amount is deducted or charged. When used in conjunction with QuickBooks, the amount can be post-dated into the checking register or credit card register when the invoice is received.
I recommend that small companies having good and consistent cash flow do this. It saves time and money by avoiding the bill payment process altogether, because entries can be post-dated directly into the checking account register. Also, when you use your credit card to pay these bills, you can earn rewards faster than if paper checks are used to pay these same bills.
3. Sign up for QuickBooks’ internal “Bill Pay” feature. QuickBooks offers a “Bill Pay” feature that is very inexpensive. It helps make your vendors and bills so easy to manage! Bills are paid electronically according to your authorization from within QuickBooks. The bill payment service takes the authorized amount from your checking account, then either issues a paper check to the vendor, or electronically transfers the money to the vendor’s account. The low monthly fee is not much more than the cost of postage and paper check printing.
4. Enter unpaid bills in a timely manner. It is very important to enter unpaid bills soon after receiving them. Waiting too long to enter them can result in late payments. This in turn can lead to finance charges and possible damage to the business’ credit score.
5. Enter unpaid bills correctly. One mistake I often see is that important information from the vendor bill is not entered correctly into QuickBooks. Examine the vendor bill carefully and enter all of the following information correctly, in the correct field in QB:
- Correct vendor name. Sometimes people are not careful about spelling mistakes here. The software will enter a new vendor name if it doesn’t recognize the one you used. This clutters the Vendor List and makes it hard to diagnose bill payment problems later.
- Bill due date. This is the single most common problem I see – people don’t enter the correct due date as shown on the vendor bill. QuickBooks may default to a certain date, but don’t assume it’s correct. Examine the vendor bill and make sure the right date is entered into QB. Entering an incorrect due date will result in a payment occurring sooner or later than necessary.
- Invoice number. Another common error is to omit the vendor invoice number. This is an important piece of information for at least two reasons:
~If you print bill payment checks from QB, it takes this number and enters it onto the check stub. This makes it easy for your vendor to know how to apply your payment.
~Entering the invoice number helps to eliminate any confusion as to which bill payment was for which invoice in your records.
After entering the bills, stamp them as “Entered” or “Posted” using a rubber stamp with red ink. Be sure to write the date you entered them on the bill.
6. Organize unpaid bills. If there are many bills, organize them alphabetically by vendor to make them easy to locate. A small amount of bills may be placed in a single file. For a large amount of bills, you may want to label some manila folders alphabetically, and organize the unpaid bills there.
7. If cash is tight, make a ‘cash projection’ before paying bills. Simple cash projection reports are easy to generate in Excel. Start with the actual amount of cash available to pay bills. Include amounts you are readily able to draw upon. Consider using any of the following:
- Checking accounts
- Savings accounts
- Lines of credit
Compute the total amount of cash you wish to use for paying the bills. (It’s important that the ‘book balance’ is used, and not the ‘bank balance.’ The book balance is the bank balance minus outstanding checks, plus outstanding deposits.) Once the book balance is determined and the cash starting point is computed, subtract bills that need to be paid from this amount. Don’t forget to include upcoming payroll, including wages, salaries, and payroll tax payments.
If there is not a comfortable cushion of cash left over, reduce the amount of bills to be paid, or somehow increase the cash starting point. You can factor in any receivables you know are coming, but be careful about this, as the anticipated receivables may not arrive when you want them to.
8. If cash is tight, communicate with any vendors who must be paid late. Let’s face it: vendors don’t like being paid late because they have bills to pay too. But they do appreciate open communication. If you must pay a vendor late, let them know before the bill is due if possible. If that’s not possible, let them know as soon as you can. Also let them know a specific date you plan to pay them. Then, make every effort to pay them by that date. Once the payment is in the mail, call or email your vendor to let them know. They will appreciate your communication with them.
My philosophy is, “What goes around, comes around.” To our customers we are vendors, and I’m sure we all appreciate them when they treat us well, pay us on time, and communicate with us when they must pay late. If this is the case, then we would be wise do the same with our vendors.
9. Pay bills on a consistent timetable. Establish a regular timetable to pay bills – weekly is a good and common choice, but your business may need to pay them more or less regularly.
10. After bills are paid, stamp them correctly, then file. Buy a rubber “Paid” stamp, and use it on each bill that has been paid. Write the check number (or payment method), date paid, and amount paid on the bill. You have a couple choices on how to file them:
- File them according to how they appear on the tax return. In other words, file Utilities together, Office Supplies together, Travel and Entertainment together, etc. This makes them easy to locate in the event of an audit, as they will be organized this way on the tax return.
- File them alphabetically by vendor. Most businesses prefer this method, as it makes the bills easier to locate for day-to-day needs.