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Bookkeeping Basics, Part 1: How to Set Up and Manage Accounts Payable

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Bookkeeping Basics, Part 1: How to Set Up and Manage Accounts Payable

By Caron_Beesley, Contributor
Published: August 21, 2013 Updated: August 21, 2013

If you’re running a business, it doesn’t matter whether you’re an independent contractor or a growing company, managing accounts payable is a key part of your everyday business administration.

Simply put, accounts payable is the process of tracking money owed by your business to suppliers. As a new business owner or sole proprietor, this can be done with a simple spreadsheet. But as your business grows, so does the complexity of your accounts payable process.

Here are some tips for setting up a workable accounts payable system that will scale with your business and help you get a better grip on cash flow and other financial reports.

Setting Up Your System

Whether you are using a traditional spreadsheet or an online accounting program such as QuickBooks, FreshBooks, Harvest or Expensify, you’ll need to start collating all your receipts, credit card expenses, and incoming bills from suppliers and enter them into your system.

For spreadsheet users, you’ll need to set up your file to capture the following line items:

  • Supplier’s/biller’s name
  • Account number
  • Expense type (e.g. office supplies, raw materials)
  • Date the invoice was received
  • Amount owed

If you’re not sure whether to make the move to an automated program, as a general rule, if you’re receiving more than two bills a day, or your expenses are racking up, then it’s a good idea to look into automation as an option to help you keep track of your bills. Many of these tools are free or available on a trial basis. If you need some training to get you up and running, contact your local Small Business Development Center, Women’s Business Center or other local small business assistance resources about training opportunities.

Entering Data

So, what data goes into accounts payable and when?

Start a daily regimen of entering incoming bills (note the payment due date and any other account information that streamlines the payment process your end). If you incur a business credit card expense, enter it on the same day. Employee expenses should also be entered (avoid fraud and streamline these by using automated expense entry programs or consolidate all employee expenses on a single credit card). Don’t forget to keep and securely store paper copies of all your documents too.

Tip: Make sure you own your own accounts payable system until you feel comfortable handing over the data entry to someone else (even then, be prepared to check it daily – you should know what’s going on with your money).

Scheduling Payments

Make a habit of paying your bills on a weekly basis and establish a window of payment that aligns with your supplier’s terms. If their terms are 30 days, don’t wait the 30 days to pay them; mail out the check or make the direct deposit payment a few days in advance of the deadline. This way you’ll maintain good relations with your vendors.

When combined with your accounts receivable system (incoming payments) your accounts payable system will help you stay on top of cash flow and inform your overall budgeting management process, i.e. plan for busy periods when outgoing costs outweigh incoming cash.

Managing Problems

It’s inevitable that there will be times when cash flow is tight and paying bills on time can be challenging. Try not to bury your head in the sand; instead, be proactive. Refer back to all your suppliers’ terms to see if their payment windows allow for any wiggle room (for example, if you’ve been paying bills every 30 days, but in fact their terms are 45 days). If you know you can’t cover a payment this month, call your supplier and be honest: tell them you’ll make a minimum payment this month, and X amount next month until it’s paid off. While it’s not an ideal situation, and you may have to pay interest, it demonstrates to the supplier that you are proactive and serious about making payments. If you have a strong record of past payments, remind them of that fact and do whatever you can to reassure them of your business viability.

When to Hire an Expert

If your accounting system is taking up too much of your time, then you may want to enlist an assistant to help with some basic bookkeeping, or hire or outsource to an accountant.

As your business grows, you might even want to consider the services of a full- or part-time CFO. More than just a bookkeeper, payroll administrator or keeper of P&L and cash flow statements, a Chief Financial Officer (CFO) can help you plan, model, forecast and make better business decisions. A CFO looks at your business holistically – this includes people, processes and systems – and ensures that together you have accurate financial information to plan for the future. Read this blog for more tips: Is it Time to Hire a CFO and Where Should You Look?

Stay tuned for Part 2 in this series: How to Set Up Accounts Receivable.

More Information

For more business accounting tips, check out SBAs free online learning course: Introduction to Accounting.

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About the Author:

Caron Beesley

Contributor

Caron Beesley is a small business owner, a writer, and marketing communications consultant. Caron works with the SBA.gov team to promote essential government resources that help entrepreneurs and small business owners start-up, grow and succeed. Follow Caron on Twitter: @caronbeesley

Comments:

Extraordinary article! Because of your last segment, "When to Hire an Master," I couldn't concur more. Knowing when to contract a master is paramount, particularly if overseeing financials isn't your solid suit or you discover you are investing an excess of time on accounting alone. Procuring a full-time . CFO could be pricey, so assets like The CFO Connection offer low maintenance CFO administrations which could be substantially all the more financially achievable for a little business. http://www.tesorierolaw.com
Though the terminology can sound intimidating, accounts payable is simply the process of accounting for and paying invoices—it's your company's updated list of debts and liabilities. Managing accounts payable boils down to adding an invoice to a log – it can be as simple as an Excel spreadsheet – as soon as you receive it. When you pay a bill, you should remove it from your current log.
Whether its a small business or a large one, it is necessary to do bookkeeping for them. Bookkeeping is essential job for every business owner. It provides the track of all the transactions of the company, and is presented in the balances sheet. The balance sheet decides the future of the company. So it has to be prepared carefully by a good bookkeeper.
Great article! In response to your last section, “When to Hire an Expert,” I couldn’t agree more. Knowing when to hire an expert is important, especially if managing financials isn’t your strong suit or you find you are spending too much time on bookkeeping alone. Hiring a full-time CFO can be pricey, so resources like The CFO Connection offer part-time CFO services which can be much more economically feasible for a small business.
Ah the days when I could run my accounts payable with a simple spreadsheet! That was long ago..it is so much more complicated now. Thankfully there are great tools like Quickbooks to help you, as well as great articles like this one!
Hiring the services of an financial services firm is a great option for many small businesses. Using an outsourced bookkeeper and controller allows the business owner to delegate business processes such as bookkeeping and payroll to a financial services firm, freeing up time that can be spent on other areas of the business.

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