Accounts Payable Management and Profitability Impact

accounts payable

Last Updated September 13, 2023

Accounts Payable (AP) is a staple of accounting, as managing your payable properly goes a long way to ensuring overall bookkeeping organization. AP management refers to the process of recording liability amounts in a record book, verifying expenses owed to a specific party, processing payment for those expenses, and documenting all payments.

AP is a short-term liability that businesses commonly refer to as a short-term debt or obligation. But Accounts Payable management is more than just noting and paying short-term debt, it’s a crucial component for every business that can actually significantly impact profitability. Let’s take a look at how – but first, how do you manage accounts payable effectively?

How To Manage Accounts Payable Effectively

Using the correct strategic management technique for suppliers and AP accounts is crucial.

1. Collaborate with Team Members and Co-Workers Effectively

The AP team and the various relevant departments of an organization, such as the approvers of respective invoices, should always work together and collaborate effectively. The team should work to develop a positive working culture for the company and help with managing finances. Remember, even though you work in different departments, you are all part of the same team.

2. Invest in Accounts Payable Software

Your business should invest in AP software, if you have the financial means. Doing so will allow all employees handling invoices or bills to have a centralized system that not only organizes invoices and bills and provides consistency, but reduces manual labor. While accounts payable software might be costly in the short-term, its long term benefits, such as reducing operational costs, could pay off in the long run.

3. Use the Right Governance Practices

Since an AP account involves significant finances, it’s crucial to manage them the right way. This includes drafting internal policies for reviewing all payments owed to third-parties. An example could be enforcing invoice verification and invoice reconciliation. The correct governance practices will improve the internal regulations the company uses when handling finances.

Plus, such methods are also crucial in reducing errors relating to calculations in AP accounts. The good thing with governance practices is that they can evolve to suit the goals of the business.

4. Go Paperless

If you utilize AP software, you’re already on the right track with this step.

Regardless, it’s crucial to utilize technology that has made its way into virtually all areas of our lives. Businesses nowadays can conduct all financial procedures without having to use traditional paper-based reports. An excellent example for companies would be to consider using Electronic Data Interchange (EDI) systems.

While such systems are technical, they can have many benefits for a businesses’ operations. The company can improve the approval process and address payments promptly. Ultimately, the business will leverage privileges from suppliers, such as rebates for being timely. A few paperless resources that can support the AP system can include cloud storage systems and Microsoft Office Online.

5. Set Up a Supplier Portal

This accounts payable management tip is likely restricted to businesses beyond start-ups, as not every small business owner will have the funds to set up a supplier portal. But if you have the means, setting up a portal for tracking and managing supplier transactions is essential.

First, it allows the business to stay organized and maintain a central resource of aggregated data. It can include information on purchase orders, stock inventory, total order costs, system users, and other helpful data forms. It also helps the company to remain accountable to suppliers and to demonstrate professionalism.

Furthermore, the portal will help reduce mistakes and provide convenience for the company’s vendors.

How Accounts Payable Management Impacts Profitability

Now that you’ve ensured your business has explored every option to optimize AP management, let’s move onto how Accounts Payable can impact your profitability.

There are various ways an AP system can have an impact on the profitability of a business. A few common ways can include:

Improved Client Relationships Leading to More Business

An AP account serves as an opportunity to be the liaison between your business and your clients. This is why it’s essential you’re taking every measure to properly manage your Accounts Payable.
A company that has developed a strong relationship with clients will also enjoy various other benefits, such as discounts, high-quality services, and dynamic payments to improve capital optimization. It’s also an excellent way to foster a trustworthy relationship with clients.
Such payment platforms provide a professional avenue for businesses and clients to transact. The company will be able to process and pay invoices with improved efficiency.

Improved Business Cash Flow and Cash Conversion Cycle

The data and information an AP account holds can improve your company’s potential at maximizing cash flows and its cash conversion cycle.

For instance, the AP account allows the business to create a longer average expected duration. That, in turn, increases the amount available for the company to handle various other operational obligations. The company will be better positioned to use trade credits by assigning any available funds to other operational priorities.

More Well-Rounded Company Audits

An audit is a necessary evil for any company today. The way a company performs an audit has a significant relationship with the conciseness of the AP records over a specific period. The ability to find detailed information on payments will improve the power of a company to organize its finances.

If the information is missing or compromised, employees need to leave other essential tasks to focus on such an issue. So, an AP helps a business stay organized and aligned with information in data audits.

Common Accounts Payable Risks: Why You Shouldn’t Ignore AP

Failing to honor agreed-upon payment terms or other payment-related obligations can have various side effects on a business’ operations. A few common ones include:

Tax and Regulatory Punishments

Not fulfilling AP payments can lead to several issues in providing accurate tax reports. Any business that violates tax report policies is likely to get in trouble with tax authorities based on the Foreign Tax Compliance Act. Furthermore, any errors arising due to late payments can lead to various financial bottlenecks for a business.

Poor Financial Reporting

The ability to reconcile payment data manually increases the likelihood of information misreporting. Usually, this issue occurs due to negligence and can compromise trust between suppliers and businesses. The company won’t have a concise way to account for any of its debts and available inventory.

Costly Errors

Any business that fails to reconcile its payments, especially on a large scale, is prone to various costly errors. These errors occur between the supplier and vendors, leading to various other issues.
Some common problems that might occur include wasted time and increased load of data to process. Any errors that go undetected are likely to cause a considerable dent in the business’s margins.

Fraudulent Activities

The lack of a concise AP system makes a business prone to various types of fraudulent activities. For instance, fraudulent suppliers or staff members might take advantage of this loophole to compromise business finances. Ultimately, failing to reconcile payments can increase the likelihood of such issues going undetected.

Challenge in Accessing Rebates or Discounts

Rebates and discounts are an excellent way to improve the profit margins of any business. A business with a reputation of failing to honor payments won’t access financial help with ease. Nowadays, most suppliers have connections with financial institutions, and they often share information on businesses that are not trustworthy.

Accounts Payable Management and Profitability Impact at a Glance

Businesses need to manage operations the right way if they want to achieve their goals. Effective Accounts Payable management allows businesses to swiftly and conveniently reconcile financial obligations with suppliers. There are various ways a company optimizes AP management with suppliers or vendors. However, ignoring AP payments can compromise the business’s reputation.