Businesses must fulfill financial obligations while maintaining communication with customers who have outstanding debts. Despite the potential complexity for an accounting department, many companies divide these tasks into two segments, Accounts Payable Accounts Receivable.
Managing your company’s outstanding accounts, known as accounts payable (AP), involves organizing and paying financial obligations. This encompasses paying suppliers and human resources promptly. Effective account management is crucial for business operations, ensuring commitments are fulfilled and financial losses are avoided.
What are Accounts Payable (AP)?
Accounts payable encompasses the management, organization, and payment of your company’s outstanding accounts, representing all the financial obligations assumed. Timely payment to suppliers and human resources serves as an illustration.
For seamless business operations, interaction with service providers, suppliers, and various stakeholders is imperative to hire human resources and acquire services and products. Effective account management becomes indispensable for fulfilling commitments and preventing financial losses.
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When reading the concept of this strategy, it seems like a very simple process: just organize the slips, pay attention to the due date of each one and pay them on the correct date, right? This dynamic exists, but the accounts payable sector has an even greater responsibility.
In addition to having to align with an established financial plan, organizing accounts payable involves understanding the company’s financial health and its ability to invest and assume new debts/costs.
In this way, accounts payable is not just a strategy to settle a company’s debt every month. This is a process that helps an organization achieve the goals defined in its growth plan, such as expanding its business.
Classification of Accounts Payable (AP)
Accounts payable are classified according to the maturity time agreed with the creditor:
Short-term accounts payable: these correspond to current liabilities that must be paid within a year from the acquisition of the debt. There are even payments that are made monthly to daily.
Long-term accounts payable: These are also non-current liabilities; the payment is made in a period greater than one year.
For this, specific data must appear in the accounts payable:
- Name of the biller, the provider to whom the debt is owed
- Company account number
- Invoice number helps ensure accurate accounting
- Type of expense the nature of the good or service purchased
- Invoice receipt date
- The payment term allows that time delays and charges for it are not generated.
- Status if the invoice has been paid or is pending payment
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What Are the Accounts Payable of a Company?
Accounts payable can be very varied, such as:
- Payment to suppliers for merchandise or products purchased.
- Wages to pay
- Rent payment
- Services provided by third parties such as electricity, water, gas, heating, internet, etc.
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Accounts Payable Process Steps
- Receipt of the invoice: When goods or services are purchased, the company receives a physical or electronic invoice that contains information such as the name of the item, amounts, etc.
- Review of the detail of the invoice: In it, you will find data such as the name of the supplier, date, amounts, and number of items purchased, among others.
- Updating and validation of the records: These must be completed based on the values contained in the invoices received and may require approvals and consultations with internal systems. If they are physical invoices, they are stored in the corresponding place.
- Payment Made: All payments made to the provider within the established due date. A series of documentation is required, such as purchase orders, and bank account information, among others.
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Tips to Improve Accounts Payable Management
Here are some tips that may be useful to improve the administration of your company’s accounts payable:
Maintain a Balance Between Your Income and Expenses
From the outset, this point might sound quite obvious. However, it is important always to keep it in mind and ensure that the level of expenses equals the income the business receives. This is to be able to keep finances healthy and prevent too many debts from accumulating in the future to such an extent that the management of accounts payable gets out of hand, making it impossible to pay them and, therefore, other serious consequences such as the cessation of operations of the business.
Choose Your Suppliers Beyond Price
When choosing the suppliers with which a company wants to work, most of them can be carried away by the price factor. However, consider the different payment conditions offered by each one since having more flexible conditions can be more beneficial than having lower prices.
Take Advantage of the Payment Terms Offered by Suppliers
And organize the payment of your invoices based on the above so that you can prioritize those with a term closest to expiration.
Maintain Good Communication With Your Suppliers
On some occasions, when your company cannot adhere to the timely payment of an invoice, it is recommended to proactively notify the supplier, explaining the situation and initiating negotiations for an alternative payment date.
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Seek to Negotiate With Suppliers to Obtain Discounts for Early Payment
Paying early, when you have the possibility, not only contributes to a good relationship with suppliers but also gives you the opportunity to obtain early payment discounts, which can positively impact cash flow.
Check That Your Suppliers Meet Their Commitments
You must confirm that each supplier is complying on time with the previously agreed commitments. If non-compliant, make the corresponding return or claim.
Set Payment Alerts or Reminders
This helps you remember the dates on which you must carry out the corresponding transactions of the various invoices. These do not have to be physical, but some technological tools give you the opportunity to have them digitally and automatically.
Automates and Standardizes the Management of Accounts Payable
It keeps track of cost and expense invoices under a standardized form. It is also advisable to manage these invoices by cost centers and projects for greater ease.
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Accounts Payable and NetSuite ERP
NetSuite ERP (Enterprise Resource Planning) is a cloud-based business management software that contains all the processes for managing accounts payable, from invoicing and tracking to payment processing.
NetSuite’s Accounts Payable module helps automate invoice approval workflow, eliminate manual data entry errors, gain visibility into vendor balances and payment status, and handle purchase orders and expenses.
NetSuite helps reduce the time spent on administrative tasks related to accounts payable, maintain control over the company’s cash flow and have greater certainty of what has been paid or will have to be paid in the future.
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Benefits of Automating Accounts Payable Process
Undoubtedly, including technology in the day-to-day of companies allows greater productivity and efficiency when managing accounts payable and digital expenses.
We will tell you about the benefits of automating the AP process and their importance for companies.
Connection Between Documents or Departments
Automating processes through a system creates the potential for more effective traceability of all documents. This allows for a comprehensive understanding of elements related to accounts payable, including invoices, credit notes, debit items, dispatch guides, payments, expiration dates, and credits, among others.
In addition, today’s solutions allow all members of accounts payable management or those in charge of this area to view all the information on the same platform in real time. Thus, they can perform their tasks more efficiently.
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Availability of a Portal for Suppliers
There are specific software or systems that allow providers to access their platforms to find out the payment status of an invoice or any other information generated around it by their own means, improving customer service times. And it reduces the work of those in charge of finances to answer calls, questions or claims to take advantage of it in developing strategies and actions that improve the accounts payable processes.
This way, the provider will always have information about their pending account, remaining collections, or any generated payments.
Error Reduction
Automating the billing and document reception processes facilitates the approval of payments to suppliers since the information can be verified quickly and simply if the data is correct.
This allows a more accurate recording and monitoring of invoices and, consequently, the reduction of possible errors such as the payment of double invoices, the disregard of credit notes, the verification of errors in amounts or amounts issued by the supplier and the fraudulent income invoices, inaccurate figures, among other actions.
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Similarly, when conducting expense audits, the likelihood of detecting errors reduces. Centralizing and storing all information in a single platform simplifies this procedure, enhancing data accuracy.
On the other hand, the solution reduces employees’ workload when carrying out this type of management.
Execution of Punctual Payments
Automating control for accounts payable significantly reduces the likelihood of payment delays caused by oversight, lack of awareness, or document misplacement. The system meticulously registers each invoice, aligning it with automated payment reminders based on its expiration date.
These platforms or software not only streamline processes but also provide functionalities for authorizing and approving payments. Furthermore, they automate the process of sending payments, ensuring suppliers receive remuneration on the specified date. In essence, this automated process simplifies and expedites the overall transaction flow.
Prepare Financial Reports in Seconds
Clicking just a few times on the Accounts Payable Automation enables the generation of reports, offering timely information to facilitate better decision-making when needed.
Thanks to the elaboration of these reports, it is possible to obtain data referring to the economic situation of a company, the total accumulated debts, the documents pending payment, the movement of cash flow, or any other element of expenses in general.
In this way, it is also possible to determine if a business has sufficient resources to meet pending obligations. On the contrary, it needs to search for and obtain other alternatives as potential sources of financing, which facilitates more effective cash flow management.
What Are Accounts Receivable (AR)?
Accounts receivable serve as the prevalent payment method in transactions, be it for services or goods. In the economic system, the focus is often on the receivable amount rather than the immediate availability of liquidity or cash during the payment. This payment mechanism is referred to as Accounts Receivable.
As per Financial Information Standards, an account receivable is defined as a justifiable entitlement of an entity to collect consideration for a transaction, reflecting the fulfillment of an obligation through the provision of services or the sale of goods.
Typically appearing as a debit balance on a company’s balance sheets, accounts receivable constitute a range of entitlements favoring the company against other parties. These arise from the company’s regular economic operations involving the provision of services or the sale of goods.
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How Do Accounts Receivable Affect the Business?
Accounts Receivable, as previously explained, represent future income derived from installment or deferred payments.
Hence, effective financial planning must prioritize this account, ensuring optimal organization.
Accounts receivable profoundly impact decision-making; they shape investment choices and commitment to expenses by anticipating funds in the future, not the present.
Certain financial instruments, such as working capital loans, may acknowledge accounts receivable as a viable guarantee.
Any business finding itself in such a scenario often reflects inadequate planning.
Therefore, maintaining control over the timing of future payments is imperative for the company to assess and manage its commitments proactively.
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Accounts Receivable and Decision-Making
In making financial decisions for the company, understanding accounts receivable becomes crucial. It provides insights into future guarantees and potential commitments. With the widespread use of credit cards, businesses must anticipate and strategize to synchronize cost and expense payments with incoming capital. This proactive approach ensures financial preparedness and effective management in the current financial landscape.
In addition, there are many other advantages, such as:
- Identify good and bad payers;
- Make payment management more efficient;
- Offer a cash estimate for subsequent months;
All these analyses are extremely important for the decision to be the most appropriate for the company’s scenario, avoiding unpleasant surprises in the future, which can often lead the enterprise to fragile situations.
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Characteristics of Accounts Receivable
These accounts act as a kind of credit or loan to a client. Defined in the invoice:
- Expiration date or collection period
- account amount
- Payment method
- Client data
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Types of Accounts Receivable
Accounts receivable should be part of a business’ accounting from a business and accounting standpoint. The collection term is essential since it defines the type of account receivable. Thus, accounts can be classified into two types:
- Short-term accounts payable: Current liabilities due within a year.
- Long-term accounts payable: Non-current liabilities payable in over a year.
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Managing Your Accounts Receivable
Efficient control of accounts payable and receivable requires constant monitoring and pragmatism. Key practices include:
- Establish Effective Billing Processes
- Keep Your Customer Database Updated
- Define Credit Approval Processes
- Perfect Your Payment Application Process
- Optimize Your Collection Processes
- Invest in Technology
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Accounts Receivable and NetSuite
NetSuite ERP is an ideal tool for managing accounts receivable. This solution automates one system’s billing, credit review, collections, and customer service processes.
NetSuite centralized database helps reduce errors and improve your teams’ workflow. Optimizing receipts and collection processes can make a massive difference in cash flow and customer relationships.
Investing in technology like NetSuite can also optimize your processes and make financial operations easier. With a good Accounts Receivable management strategy, any business will have a greater chance of success.
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Accounts Payable vs Accounts Receivable
The distinction between these two types of accounts lies in their purpose: Accounts payable exist to reduce debt, while accounts receivable exist to increase sales.
The accounts payable vs accounts receivable difference also lies in their relationship. Accounts payable describes the amount of money that you owe, while accounts receivable reflects the amount that customers owe your business.
This means that when a customer pays for goods and services provided, it will show up as an increase in accounts receivable and a decrease in accounts payable. On the other hand, when you make payments to suppliers for goods and services, it will show up as an increase in accounts payable and a decrease in accounts receivable.
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Conclusion
Accounts payable (AP) and accounts receivable (AR) are two important aspects of any business. In this guide, we’ve outlined the basics of each process and what you need to know in order to effectively manage your company’s finances.
Contact us at OdeCloud today if you’re looking for more information or thinking of optimizing your AP/AR with NetSuite ERP. Let us assist with the tech so you can focus on running your business. Thanks for reading!
