Accounts Payable
Every company has both an accounts receivable and an accounts payable department in the sense that, what is a payable for one company is a receivable for another and vice versa. This article is going to review the accounts payable and accounts receivable functions a company must undergo in order to maintain proper accounts management and keep their business running effectively.
The goal of accounting in any business is to create a balance between the money that you have coming in and the money that you have going out. Depending on how big a company is, they may choose to either do their accounting in-house, or outsource it if the accounting for the business is very complex. When you do in-house accounting, you will save yourself the expense of creating another payable, so if you have a small business, in-house accounting may be the easiest and most effective means of creating your credits and debits balance.
In-house accounting generally involves the service of an accountant or a bookkeeper to run the business accounting. If the business is very small, a professional accountant or bookkeeper may not be hired, and the accounting will be run by the individual running the business. In any event, in-house accounting will involve the creation of a ledger that handles the records of all monetary transactions, whether they are in-coming or out-going. The records will be kept on a balance sheet that from period to period (i.e. monthly) will provide a picture of the business’s financial status.
If you have a large business with a complex flow of cash both in and out of the company, you may want to outsource your accounting. Both accounts receivable and accounts payable are critical functions within the accounting framework, but outsourcing accounts payable will enable your company to ensure all bills are paid on time. If you are outsourcing all of your accounting needs, you will probably find two separate companies so that you have one company managing your payables, and one company managing your receivables. If you have a separate company managing your receivables, you may want to ensure they are able to act as credit or collection advisors when your own customers have issues managing their payables.
The benefits of outsourcing your accounts payable department is that it will allow the managers and administration in a business to focus primarily on business functions, and less on administrative tasks such as cash flow. The management within a company will be able to perform specific company related tasks without the need to employ accountants and bookkeepers and ultimately manage them. All of these issues come at time-cost, which is time that could be spent earning revenue for the company instead of managing it.
It is also a good idea for some small businesses to outsource accounts payable particularly if they do not have accounting experience. Failure to do so may cause problems and complications within the accounting infrastructure, and thus, a loss may be incurred by the company. Losses are often a result of defaults, late payments, or even a loss of trust between two serviceable companies. Any loss to a business, whether it is tangible or otherwise, is not good for the business's bottom line. Outsourcing accounts payable for a small business may come at a cost, but in the long run, could actually end up saving the company money.
There are many benefits to any company that outsources their accounts payable department. While even small business will benefit from outsourcing this department, corporate and big business stands to gain the most benefit from this process.
By outsourcing accounts payable, and/or accounts receivable, the company will ensure all invoices are paid in a timely manner and done so with accuracy and efficiency. Further, reports on a monthly or quarterly basis will be easier to obtain, more accurate, and provide a better picture of the company’s status when they are provided by professionals dedicated to the task. Tax functions that are processed through outsourcing will also save the company valuable labor and time expenditures when they are performed in house. Further, depending on where the company chooses to outsource, they could actually end up saving money by having it performed elsewhere as opposed to in-house. India, for example, is known to be a leader in cost-effective outsourcing solutions.
When a company decides to perform their accounting processes in-house, they will need a few key elements to ensure the smooth flow of monies in and out of the business. They will need to hire an accountant or a bookkeeper that has knowledge and practice in the field and can perform the job adequately. Companies that perform in-house accounting will also need to use effective accounting software that will run both accounts payable and accounts receivable in a manner that is organized and effective for the company. Unless the business is very small, accounting software is a necessity for every working business.
Requirements for the kind of accounting software are going to vary from company to company. The larger the company, the more complex your software is going to be. What you want ultimately is something that can provide detailed transaction information as well as overall picture information. You will want to ensure your accounting software includes basic bookkeeping tasks, processing of payroll, creation of reports for management, accounts receivable and invoicing functions, control of credit (both incoming and outgoing), accounts payable, general or nominal ledger transactions, inventory, purchasing, and sales. Depending on the size of your business, you may not require all of these elements, but for an average sized business, these are standards in all accounting software. If you hire a professional accountant or bookkeeper, they will be able to help you choose a good software program.
The most important element you will need in your accounting software will be the accounts payable modules. The reason for this is without the ability to pay your bills effectively as a company, you will fail as a business regardless of what your accounts receivable situation looks like. The accounting software that you purchase should have good accounts payable functions within it. Surprisingly, research is showing today that many businesses are still functioning with paper bookkeeping or spreadsheets and are failing as a result of poor accounts payable management.
The benefit of accounts payable modules in your accounting software is that you will save money in the long-term. If you use the accounts payable modules on a consistent basis, and correctly, your business will run much smoother. You will be able to have reminders generated that bills need to be paid, have payments generated, and have payments recorded as well. Your software will be able to electronically retrieve any of these records if you ever need them at your fingertips. With paper bookkeeping, this process is much more time consuming, and thus, accounts payable software will definitely save your company both time and money in the long run.
Invoice processing software is another method that companies are using today to ensure their accounting gets handled as efficiently as possible. The difference between this kind of software and standard accounting software is that this kind of software is specifically dedicated to the processing of invoices for both accounts receivable and accounts payable. With invoice processing software, administration costs are reduced, and business are able to make better use of time and costs when it comes to managing invoices.
Invoice processing works at the accounts payable level, and will allow the company to process their accounts payable invoices automatically and immediately. The invoices that come into accounts payable are scanned into the invoice processing software and are immediately reconciled with the purchase order for which they were created. This step alone will alleviate the labor time and cost of manual data entry.
After they are reconciled with their purchase orders, the invoices will then be fed into the system to extract the data necessary to fulfill the accounts payable requirement. Billing dates will automatically be entered, and payment dates as well. Invoice processing systems are an extremely efficient way to manage your accounts payable department if you have a large business, and are looking to save the company the cost of outsourcing.
The function of accounts receivable is the function of the company to collect monies owed following the rendering of products and services. The business will take records of the transaction that include the amount owed, and how long the business they are working with has had credit, for example, the agreed upon term may be net 30 days. This is the record of an invoice. The invoice will be sent to the company at a set time and date every month and then payment will be expected.
Most of the time payment will be made and the accounts receivable process for that particular invoice will end there. However it is estimated that 3% of all invoices go unpaid, and thus, the collection process will be initiated. For small business, this will ultimately consist of phone calls until the debt is cleared or written off. For larger companies, a firm may be outsourced to collect the accounts receivables. This may cost the business a commission or fee on the receivables, so depending on how much money is owed, the business needs to decide if the collection process is worth the expenditure.
A common practice in accounts receivable is when companies use recourse factoring to alleviate cash flow issues. If customers are slow to pay, using a company that provides factoring can help you obtain some cash flow until the invoices are paid. Ultimately, the factoring business will hold your invoices for the business and give you a cash advance on the unpaid invoices. As the accounts receivable debts get cleared, you pay the remaining costs directly out of the company’s pocket.
If an invoice does not get paid by one of your customers, your recourse factoring company has the right to take money from your business. This may seem like a high risk for you, but it is a low risk to the factoring agency. Many agencies will do this due to the low risk involved. And, if your business is suffering that much but has a good outlook, it may be a good idea to use recourse factoring to get you out of a crunch.
Scheduling accounts receivable is the most important element to your accounting system within the accounts receivable framework. If you do all of your accounting in house with an accountant or a bookkeeper, you will want someone that organizes your accounts receivable so that everything is done at the same time and in the same way every single month. Even if your accounts payable is handled in a timely fashion and your bills are paid every month, if your receivables are not coming in at the same time every month, your business will fail. You need to ensure your business, and ultimately you, receive payments on a regular basis so that your business functions adequately. Setting up accounts receivable scheduling is the most important element in your accounts receivable department.