Last Updated on August 26, 2021
Accounts Payable (AP) is an essential resource for businesses in the management of payable obligations. Usually, AP refers to the amount a specific party owes to a given supplier or vendor. To elaborate, once the client places an order and receives it before releasing finances, they should record the liability amount in a record book.
It’s a short-term liability that businesses commonly refer to as a short-term debt or obligation. Once the client submits a payment, the vendor then confirms the specific payment amount from the corresponding AP account.
How Accounts Payable Impacts Profitability
There are various ways an AP system can have an impact on the profitability of a business. A few common ways can include:
It Works as Intermediary with Vendor Service
An AP account serves as the perfect liaison between a service provider and the clients, thus facilitating a company that would not have occurred traditionally.
A company that has developed a strong relationship through this approach will also enjoy various other benefits, such as discounts, high-quality services, and dynamic payments to improve capital optimization. Plus, 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.
AP Accounts Improves the Cash Flow of a Business
The data and information an AP account holds can improve the company’s potential at maximizing cash flows.
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.
Helps with 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.
Strategies for Managing Suppliers and Accounts Payable
Using the correct strategic management technique for suppliers and AP accounts is crucial. The AP team and the various relevant departments in the company should find ways to collaborate effectively. The team should work to develop a positive working culture for the company and help with managing finances.
A significant aspect of this process involves invoicing, which often requires timely results. Any business should come up with a strategy for managing suppliers and accounts payable. A few helpful suggestions include:
Develop a Centralized AP Platform
The company should invest in a service that can prepare a centralized AP platform. It’s a system that allows the employees and suppliers of the company to stick to specific standards. Plus, the platform will enable the organization to track the activities of each user of the system.
The other benefit of this approach is that it will also help reduce enterprise costs. While developing such a system is an additional investment, the overall benefits make it reasonable. Plus, it’s an investment that will help reduce operational costs significantly in the long run.
Use the Right Governance Practices
Since an AP account involves significant finances, it’s crucial to manage them the right way. 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.
Technology has made its way into virtually all areas of your 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.
Set Up a Supplier Portal
Setting up a portal for tracking and managing supplier transactions is also 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.
Common Accounts Payable Risks: Risks for Ignoring AP
Failing to honor an agreed AP payment 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.
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.
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 for 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.
AP Management and Profitability Impact at a Glance
Businesses need to manage operations the right way if they want to achieve their goals. Accounts payable is a system that allows a business to manage financial obligations with suppliers conveniently.
There are various ways a company optimizes AP management with suppliers or vendors. However, ignoring AP payments can compromise the business’s reputation.
Grey is the Director of Marketing for altLINE by The Southern Bank. With 10 years’ experience in digital marketing, content creation and small business operations, he helps businesses find the information they need to make informed decisions about invoice factoring and A/R financing.