What are the Best Practices to Manage Accounts Payable and Accounts Receivable?

Are you constantly keeping a tab on who owes you and who you owe? Does managing your AR and AP become a monthly fire drill?

For many businesses, it has. The root cause? Slow approvals, manual processes and disconnected systems.

Do you feel stuck too? You won’t anymore, as we have a fix.

Dig into this blog to explore the accounts payable and accounts receivable best practices and reduce the headaches that come with your financial management.

Let’s jump in. 

Effectively managing accounts payable and receivable is crucial for maintaining your business’s financial health.

AR and AP are like bread and butter; they maintain a healthy equilibrium between revenues and expenditures. Additionally, both directly impact your business's cash flow, supplier relationships and customer satisfaction.

However, sometimes the concepts of AP and AR often get confused.

So, before we discuss accounts payable and accounts receivable best practices, let’s briefly understand what AP and AR mean. 

What are Accounts Payable?

Account Payable is the funds you owe the supplier for goods or services you purchased on credit. Accounts payable (AP) are recorded as an expense in your accounting records and shown as a total on the balance sheet.

Payments are made according to agreed-upon terms with your supplier, such as 30 days after receiving your invoice. After making a payment, you can mark the expenses as paid.

You can keep a record of accounts payable in two ways:

1. Accrual Accounting: You record the expenses when they happen, even if you did not make the payment. 
2. Cash Method: You register the expenses only when paid.
   

Moreover, you can also calculate the average days your company takes to pay creditors and suppliers. You can do so by calculating the DPO.

DPO (Days Payable Outstanding) indicates how well you manage your cash flow and supplier relationships.

What are Accounts Receivables?

Accounts receivables are the amounts your customers owe you for the goods or services you have already provided and invoiced.

AR is recorded or listed as current assets on your balance sheet. After delivering your goods and services, you can have payment terms like net 30, 60 or 90 days. If you have large or custom orders, you can also request upfront payments.

Your AR team can invoice the customers and track the receivable amounts until you receive the payment. If your payments are late, you can set up follow-up reminders or send late-fee notices.

To track your AR, you can record it as accrual accounting.

The money your customers owe you is listed as a “ Current asset” on your company books. Once the customer pays you, your finance team updates the records by debiting the amount in accounts receivable and making the payment against the correct account.

Thus, balancing both AP and AP is crucial for a company's financial health. Mismanagement on either side of AR or AP can adversely affect credit and the stability of your company or business. 

Chasing payments and tracking invoices should not reduce your productivity, weaken your relationship or disrupt your business. To help you overcome these bottlenecks, we have five quick tips for managing your accounts receivable and payable.

1. Establish Clear Policies

Establish clear and consistent payment terms or policies for both AP and AR. Communicating the payment terms clearly with your suppliers and customers will help you set transparent expectations and avoid misunderstandings.

Set terms and conditions for due dates, discounts for early payments, and late fees for delays.

Best Practices

• Establish and define payment terms upfront for every transaction. 
• Put all the terms and policies in writing so that all the parties know their obligations and deadlines. 
• Communicate the consequences of late payments to all parties involved. 
• Provide discounts or early payment incentives for prompt payments.
  

With this clarity and payment policies, you can foster your relationships and have a healthy cash flow. 

2. Regularly Monitor Your Cash Flow

Regular cash flow monitoring is a good practice for anticipating financial needs, adjusting payment schedules, and avoiding sudden cash shortages.

Tracking your cash flow into and out of your business helps maintain a healthy relationship between your AP and AR processes.

Monitoring will not only help you manage your obligations on time but also help you keep your operations running smoothly.

Other Benefits

• Avoid cash shortages and late payment penalties by identifying patterns. 
• Get insights into when to pay suppliers and collect payments from clients. 
• Prevent financial surprises and have better control over your financial planning and budgeting.
  

Therefore, streamlining accounts payable and receivable is possible by regularly monitoring your cash flow. This way, you can stay ahead of potential financial problems and anticipate the highs and lows. Ultimately, this will support the growth and operation of your business. 

3. Automate Your Processes

Manually handling your payments, processes and invoices, is time-consuming and error-prone. That’s when the role of technology in accounting comes into play.

You can leverage technology by automating your AP and AR processes. Automation will help you simplify invoice generation, payment tracking, and payment reconciliation.

Other Benefits

• More accurate and reliable financial records. 
• Quicker turnaround time for paying vendors and client collections. 
• Real-time updates on cash flow and better cash flow visibility. 
• Cost-savings with reduced need for manual labor.

Investing in automation can be a smart move for your overall financial health and business growth. 

4. Utilize Data Analytics

Data analytics plays another crucial role in the functions of accounts receivable and payable. Leveraging data analytics, you can gain valuable insights into payment behaviors, cash flow trends and other inefficiencies.

Why It Matters?

• You can identify trends and optimize payment strategies. 
• It offers insights into customer behaviors. 
• Predict cash flow trends to make better decisions.

Moreover, key metrics like Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO) can provide you with the information you need to address issues and improve your cash flow management. 

5. Build and Maintain Strong Relationships

A solid relationship works well for improved financial results. Whether you are trying to speed up the payment process or negotiate a better discount, maintaining strong relationships with your supplier and customer is pivotal. 

Positive rapport and trust can lead to favorable contract terms and help reduce costs. Moreover, proactive communication reduces the likelihood of delays, misunderstandings and disputes. 

Why It Matters?

• Stronger relationships will give you an upper hand in negotiations. 
• Better communication and trust increase the possibility of timely payments. 
• Optimistic relationships lead to long-term business success. 

Therefore, you can ensure that your cash flow remains steady by addressing accounts receivable best practices and effective accounts payable strategies.

Furthermore, ensuring timely payments will not only strengthen your relationships but also contribute to a robust and flourishing business.

Managing accounts payable and receivable can feel like clockwork, with payments flowing in and out smoothly. It does sound ideal, but unfortunately, financial management can quickly spiral into chaos.

Here are some common pitfalls that can derail your financial stability:

1. Errors and Inefficiencies

Inaccurate data entries, missing invoices and overlooked payment terms can result in incorrect financial statements, delayed payments, penalties and strained relationships.

2. Late Payments

Late payments may affect your company's overall rating and reputation and lead to cash flow problems. You risk losing your creditors' or customers' trust and faith. Penalties associated with late payments can also result in higher expenses.

3. Cash Flow Disruptions

Cash flow disruptions in either AP or AR may ripple and affect your ability to meet financial obligations. 

Insufficient cash flow, liquidity issues and unpaid or late invoices can make it challenging for your business to invest in expansion prospects or handle daily costs. 

4. Discrepancies Over Invoices

Discrepancies over invoices lead to delayed payments, frustration and the risk of overpaying or underpaying. These discrepancies may take time to settle and stall the payment process until the issue is resolved.

5. High Volume of Transactions

Tracking all your payables and receivables can be difficult if you are dealing with a high volume of transactions. 

The sheer volume of these transactions may overwhelm your accounting staff, leading to missed payments, incomplete records and increased administrative costs

You can improve the accounts payable process and avoid accounts receivable setbacks by streamlining accounts payable and receivable management.

Managing and streamlining accounts payable and receivable should not be an overwhelming process.

By outsourcing these processes, you can optimize your financial process better. If you need assistance, our licensed accountants have the experience and expertise to handle all your financial needs.

So, who are you waiting for? Contact us today for all your accounting requirements, from improving your accounts payable processes to handling accounts receivables. 

1. What is the difference between an account receivable and accounts payable?

Accounts payable and accounts receivable are two opposite concepts of business accounting.

Accounts receivable are the money a company is entitled to receive from its customers for the goods or services it has provided.

Accounts payable are the money a company owes to its suppliers or vendors.

2. Is account payable a debit or credit?

Credit. Accounts payable is the money a company owes to its vendors or suppliers for goods or services bought on credit. It's a type of liability account and is recorded as a credit in accounting.

3. What is AR balance?

The company's accounts receivable balance is the total amount of money that its customers owe for goods or services that have been provided but not yet paid for. It includes outstanding invoices or bills awaiting payment.

4. What is an example of AR and AP?

Example for AR: Invoices sent to customers for products or services provided by a business. 

Example for AP: Invoices received from suppliers for purchase or services. 

5. What is AR in billing?

Accounts receivable (AR) is an accounting term for money owed to a business for goods or services delivered but not paid for yet. It is listed on the company's balance sheet as a current asset.