While it seems like accounts payable is a drain on your business, it would be pretty difficult to keep your stock levels up if you didn’t pay your vendors. In fact, your accounts payable are so important to your business function that you really need a way to track them and determine how long your invoices due have been outstanding. This information is essential to maintaining a good reputation and good credit.
The process, called accounts payable aging, involves organizing your outstanding invoices by date so that you know which are the oldest, allowing you to prioritize the application of your cash flow to the oldest invoices. Correct usage of your cash flow in this manner will leave your business in a better overall position from several perspectives.
First of all, keep in mind that due date timelines for most accounts payable are similar, giving you 25-30 days for repayment. Exceeding that date can and will end up in penalties ranging from monetary impact to suspension of the account that keeps you from receiving orders from the merchant or vendor until the outstanding invoices are paid. In some instances, the relationship between your company and the vendor may be terminated entirely. However, through accounts payable aging, there will never be a time when you don’t notice and respond to an invoice prior to this becoming a problem, since the oldest invoices will appear first.
Also, without proper accounts payable aging, your cash flow can be misapplied, which will lead to further discrepancies and mistakes in the accounting process. By addressing newer invoices first, you may lose old ones or look at your balance and note a larger sum of money than is actually available, since some of that has not yet been applied to older invoices that should have already been paid.
Proper accounts payable aging requires logging and cataloguing all incoming invoices, including data on the vendor, date of receipt, amount, and date that payment is due. The ability to enter a paid date so that the invoice can be taken off the list should also be included. Then, an aging report can be put together listing the older invoices first so that you can make a proper analysis and pay the correct debts first.
Aging your accounts payable will offer a more accurate view of your outstanding debt, as well as a more realistic assessment of your cash flow and profit margin. Since keeping track of this information will keep the bills paid on time, you will guarantee that the business’s credit remains intact and its reputation shines.
Accounts payable aging can be done manually with proper time and organization. However, it can be a bit of a hassle, especially with a multitude of vendors, and it is also really difficult to create the ordered report and view invoices in order by date. Luckily, however, most accounting software packages have such ability, including the automated response of invoices falling off the report when a paid date is entered.