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Anyone working in business or finance must have a solid understanding of accounts payable. Managing the cash flow of any operation is a big part of conducting good business. Accounts payable keeps track of the vendors, goods, and supplies ordered, and it helps to create accurate balance sheets and reports for tax and other essential purposes.
The Accounts Payable Process
When the company spends money, they either pay by cash or are invoiced by the vendor. The invoice is entered into the system for payment, and it’s put into the queue according to the purchase terms. When the payment is due, the accounting clerk pulls the applicable invoices and marks them for payment.
Then, a check is cut to the vendor to pay the debt. Your accounting department requires accurate records on both the payable and receivable sides. Controlling your incoming payments and outgoing debt is vital, as many companies close because of poor record keeping and lack of financial control. As the owner, you should be able to pull a report with accurate data anytime you need it, and you should never have to question the integrity of the records.
Reports, Closings, and Taxes
Before you pay taxes, cut payroll checks, or make any significant business decisions, you want to pull a financial report. Have you ever had to get a bank loan? The bank wants to see your balance sheet, which is a snapshot of your business’s financial standing. It documents both long-term and short-term debts and gives any lender a good snapshot of your company’s finances.
Your incoming revenues or receivables are just as crucial as your outgoing. If any of your numbers don’t mesh, it can cause you to be denied a much-needed loan. Another issue with inaccurate data is it can cause you to over or underpay your taxes, which can be a significant problem.
Additionally, there are many times within the month that you pull reports to check on your cash flow. Any owner who has their eye on that bottom line will typically make wise financial decisions. When you do specific projects, you watch the numbers closely to ensure you’re getting a good return on your investment. Consequently, you need to keep a close eye on the numbers continuously and not just in times of financial woes.
The Human Error Component
If the data you’re using to base your analysis on has even one error, it hinders the integrity of your financial state. Banks, the IRS, and your overall credit rating as a company depend on your records. Humans are fallible.
Anytime there’s human involvement, there’s a chance that something can be entered incorrectly. Duplicate invoices are always an issue, especially if you have more than one person with their hands in your books. Plus, there are tiny errors that have a significant impact on your credibility.
For instance, an invoice dated December 12, 2022, might be entered in January, which can erroneously be entered as a 2023 invoice. It can be missed for payment when a simple date error causes it to fall into the past-due category. This can cause late fees and angry phone calls from vendors looking for compensation.
The invoice is in the system, but when given the wrong date, it will fall into the 30/60/90-day late category unless it’s brought to someone’s attention. Accounts payable automation is the answer, as it removes much of the human equation from the mix.
The difference in using an automated program is that you forgo painstaking tasks like the end of the month and yearly closings, and you will have real-time financial reports available at the touch of a button.
Essential Accounting Skills
Accounting errors happen all too often on both the payable and receivable sides. However, when it comes to payables, it can leave you with angry vendors and possible legal action. Even if these errors are honest mistakes, they can be very costly.
According to a financial article, the most common accounting errors come from hiring people who aren’t adequately trained, trying to do it all yourself, not tracking receipts, and failing to review the books often. The accounting department is part of your corporate overhead, and when this one area of your business is lacking, it can be a financial disaster.
Your accounting department prepares financial statements, manages the general ledger, pays your bills, and handles the payroll for your employees. The overall economic front of your business depends on these records, so it’s essential to create accountability and enhance current processes.
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