Do you know what current accounts payable are? Most businesses do, and they need one to keep operations going smoothly. But what is it, exactly? And why is it so important? In this post, we’ll explore those questions and more. We’ll also look at some benefits businesses can enjoy from having current accounts payable. So if you’re curious about this essential business process, read on!
What Are Current Accounts Payable?
Current Accounts Payable are short-term debts a company owes to its suppliers for goods or services supplied on credit.
When a company purchases goods or services on credit, the supplier usually sends an invoice to the company. The amount owed is typically due within 30 days. Companies often have multiple accounts payable, each with a different supplier. On the balance sheet, accounts payable are reported as a short-term liability. When the invoice is received, it is recorded in the accounting system as an accounts payable. The payment is then made when it is due.
When the company pays the supplier, it reduces the accounts payable liability by the same amount. Thus, Accounts Payable can be thought of as a form of short-term debt.
Many companies use AP to finance their day-to-day operations, which is often cheaper than taking out a loan from a bank. In addition, payables can help improve a company’s cash flow by delaying payments for goods or services until they are actually received.
However, if AP is not managed carefully, it can quickly get out of control and become a burden for the company. Therefore, businesses must keep track of their accounts payable and ensure they are paid on time.
What Is The Current Accounts Payable Process?
The accounts payable process is responsible for paying suppliers and vendors for goods and services purchased by the company.
The Accounts Payable (AP) department typically handles incoming bills and invoices, but depending on the size and nature of the business; the AP department may also serve additional functions.
The accounts payable process can be broken down into four steps, though the complexity and length of each step may differ from company to company.
To understand how the accounts payable process works, let’s look at an example.
Imagine that you own a small business and have just purchased from a supplier. The first step in the accounts payable process is to create an invoice. This invoice will include all relevant information about the purchase, including the date, the amount owed, and the due date. Once the invoice has been created, it will be sent to the accounts payable department.
The next step in the process is for the accounts payable department to verify that the invoice is correct and that there are no errors. Once the invoice has been verified, it will be sent to the person responsible for approving payment.
This person will review the invoice and decide whether or not to approve the payment. If payment is approved, a check will be issued and mailed to the supplier. The supplier will deposit the check and send you a receipt confirming that payment has been received.
Finally, the Accounts Payable department will update its records to reflect the payment made.
As you can see, the Accounts Payable process is essential for businesses to ensure that vendor invoices are paid on time, and that accurate records are maintained. Following this process, companies can avoid costly mistakes and maintain strong supplier relationships.
How To Calculate Current Accounts Payable?
Calculating your current accounts payable is important to maintain a healthy cash flow for your business. There are a few different ways to calculate this number, but the most straightforward method is simply adding up all your outstanding bills. This total will give you an accurate picture of how much you owe and help you budget accordingly.
Remember that your current accounts payable may fluctuate monthly, so it is important to check this number regularly. By staying on top of your finances, you can always have the necessary funds to meet your financial obligations.
Here’s the formula:
bill 1 + bill 2 + … + bill n = ($) Current Accounts Payable
The total amount of current accounts payable is one thing, but to have a better understanding, you want to calculate days payable outstanding (DPO).
In accounting, DPO is a measure of a company’s liquidity and the amount of time it takes to pay its suppliers. It is calculated by dividing the total amount of days’ worth of purchases that are outstanding by the average daily cost of goods sold.
The calculation,for DPO, is as follows:
Historical DPO = Accounts Payable ÷ Cost of Goods Sold x 365 Days
In addition, historical trends, or an average can be taken with the industry average as a reference to forecast accounts payable needs. Using the company’s DPO assumption, you can use this formula to project accounts payable.
Forecasted Accounts Payable = (DPO Assumption ÷ 365) x COGS
Current Accounts Payable Example
Company XYZ purchases office supplies on credit from ABC Office Supplies. The total amount of the purchase is $500. Company XYZ will receive an invoice from ABC Office Supplies for the purchase. The Accounts Payable department at Company XYZ will record the purchase by debiting Accounts Payable for $500 and crediting Office Supplies Expense for $500.
The Accounts Payable department will then pay the invoice when it is due. To do this, they will debit Cash for the amount of the invoice and credit Accounts Payable for the same amount. This will leave the Office Supplies Expense account unaffected.
At the end of the accounting period, the $500 Accounts Payable liability will be reported on the balance sheet.
Benefits Of Current Accounts Payable For Your Business
Having a current accounts payable system for your business can be incredibly beneficial. The current Accounts payable system allows businesses to track and manage money owed to vendors and suppliers.
Here are some of the key benefits of having a current accounts payable system:
Improved Cash Flow Management:
The accounts payable system allows businesses to easily track and manage cash flow, helping them plan future payments better. With the right system, businesses can set up automatic payment reminders so that all invoices are paid in a timely manner. This helps avoid late fees and penalties and keeps vendors happy.
Early Payment Discounts:
When invoices are paid on time, businesses can often negotiate discounts with vendors since they have proven their reliability. This could mean significant cost savings in the long run.
Easier Vendor Relationships:
Having a reliable accounts payable system can help organizations build better relationships with vendors. Being able to pay invoices on time and having a good reputation with vendors can go a long way in securing better deals.
Increased Efficiency:
Automation can help streamline the accounts payable process, making it more efficient and saving businesses time. With a current system in place, organizations can also use analytics to gain insights into their cash flow and spending patterns.
Overall, having a current accounts payable system is an essential part of running a successful business.
Reasons Why Businesses Should Automate Their Current Accounts Payable Process
Current Accounts payable is the “most time-consuming, laborious and paper-intensive finance and administrative function,” according to controllers surveyed led by the Institute of Finance and Management.
The Accounts Payable automation software digitizes the whole process so that most invoices can be processed without manual intervention, while the AP department deals with exceptions and outliers. This can save time and make the entire process more accurate.
There are many other advantages to automating accounts payable, including:
Fewer late payments and penalties
Paying invoices on time can be challenging for even the most organized businesses. When invoices are paper-based, they can get lost in the shuffle, and it’s easy to miss a due date. This can lead to late fees and penalties, which can quickly add up.
With AP automation, invoices are digitized and stored in a central location. They’re also typically integrated with your accounting software, so you can see when payments are due. This makes it easy to stay on top of your payments and avoid late fees.
Improved supplier relationships
Paying invoices late can damage your relationship with suppliers. They may be less likely to offer you favourable terms in the future and even stop doing business with you altogether.
You can avoid these problems with AP automation by paying invoices on time. This will improve your relationships with suppliers and make it easier to get the terms you want in the future.
Reduced processing costs
Paper-based invoices require manual data entry, which is both time-consuming and error-prone. Automating accounts payable can reduce or eliminate the need for data entry, saving you time and money.
Increased visibility and control
When invoices are paper-based, it can be difficult to keep track of them. This can lead to missed payments and late fees.
With AP automation, you can see all your invoices in one place. This makes it easy to stay on top of your payments and avoid late fees.
Improved compliance
Many businesses must comply with government regulations, such as the Sarbanes-Oxley Act. AP automation can help you meet these requirements by providing a paper trail of all your invoices. This can make it easier to audit and avoid penalties.
Wrap Up
For any business, but especially for small businesses, current accounts payable is essential to maintaining cash flow and preventing late payments. In addition, businesses can focus on their core competencies and leave the accounting to professionals. If your business is struggling with its Accounts Payable, consider outsourcing this function to a reputable provider. You may be surprised at how much it improves your bottom line.