Accounts payable (AP) is one of the most important departments in any company. If your company’s finances are healthy and you are able to forecast accurately, you might even consider creating a department for AP. However, this department can become even more important if things start going south. As a business owner, manager, or other individual running a company, you will undoubtedly encounter situations where you need to deal with accounts payable as quickly as possible. If you do not have a good system for tracking these payments, you could have many problems. In this article, we will discuss some common issues that companies face with their AP department. If you are struggling with your AP department and want to get back on track, read on the following points.
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No idea about accounts payable ledgers-
One common issue with AP departments is that you do not know your accounts payable ledgers. If you do not know your accounts payable ledgers, you will make a mistake in your AP management. For example, you will have a ledger on your computer or spreadsheet that shows the transactions in your AP department. However, you will not be able to correlate these ledger entries with your accounting system. Businesses need to be extremely careful in reconciling their AP ledger with the accounting system to ensure that there are no double entries in the accounting system. Your biggest mistake in the AP department will be if you double or misreport any entries in your accounting system.
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Late payments to vendors or individuals-
Another issue that can develop in the AP department is missed payments to clients, customers and vendors. If you are behind in paying these parties, your accounts payable department cannot do the job. If you are paying late to vendors, you might end up paying late to your staff members. If vendors owe you money, you must take care of those payments quickly. You must ensure that you keep up with your payments on time and do not fall behind. Sometimes, vendors/suppliers also provide early payment discounts to encourage timely payments by businesses. However, business owners can miss out on such opportunities if they make late payments to vendors.
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Incorrect information from vendors-
One of the most common issues with accounts payable is incorrect information from vendors. If you are not getting accurate pricing from vendors upfront, you could be paying too much for a service or product. You could also be missing out on potential discounts for larger purchases or for using a certain payment method. During the ordering process, ensure the correct information about the pricing and transaction terms. If vendors are providing incorrect information, it is up to you to ask them to correct it. This will ensure that you pay the correct price for products and services.
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Timing issues-
Inaccurate timing is another AP challenge faced by businesses. If you are paying a vendor for a product or service before you receive it, you could be running the risk of being scammed. In this situation, you should ensure that you have the payment terms in writing. Make sure that you know when you have to pay for the item and when you expect to receive it. If you are taking credit from a vendor, you should make sure that you understand the interest rate and repayment terms. This will help you avoid interest charges and ensure you have enough money to pay the vendor.
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Lack of automation-
When you are a one-person business, you might think that you do not need a centralised system to manage your accounts payable. After all, you are in charge of everything. But as your business grows, you will soon realise that having a centralised system to automate payments and retrieve accounts will save you time and make your job easier. The less human error in your books, the more time you will have to focus on strategic planning, growth initiatives, and other important aspects of your business.
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Overdue invoices and payments-
A lack of automation and control in accounts payable can often lead to late payments and unpaid invoices. The first step in addressing this is to assess your current cash-management practices. Are you signing your credit card suppliers’ invoice copies without reading them carefully? Are you forgetting to enter invoices into your system? Do you pay suppliers by cash when they deliver goods to your office? If so, are you keeping a record of when the goods are delivered? These are just a few ways businesses can forget to manage their cash. The first step toward correcting such issues is to acknowledge them. Sometimes, when an invoice is overdue, the vendor may contact you to remind you of payment. Though it is not a big problem, it can hamper your vendor relationship and even lead to late payment fees.
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Ineffective communication between departments-
Even though you must communicate between departments in order to run a business, many owners fail to do so. This can often stem from the feeling that their department is the most important. However, it is important to remember that every department has equal relevance in the operation of a business. One of the many reasons for this is that, when you are operating a business, you might feel compelled to spend as much time as possible with sales and marketing. A lack of communication between departments can significantly impact your accounts payable.
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Ignoring small discrepancies –
The most trivial issues can result in the biggest consequences if you are not careful. If, for instance, a supplier asks for a small discount on an invoice, you must negotiate the terms before signing the invoice. But a few minute’s delays can result in the invoice being rejected. Alternatively, you might simply sign the invoice and forget to check that the amounts are correct. Then, when you pay the invoice, you have a discrepancy between your accounting records and the amount on the invoice. To avoid this, try to keep all accounting ledgers in one place and check them at the end of each day. That way, you can spot any discrepancies before they become big issues.
Conclusion
The best way to ensure that your AP department is as strong as possible and that it runs smoothly is to follow the best practices for AP. As you can see, there are many practices that you can follow to ensure that your AP department is as strong as possible. By following such practices, you can set up and maintain an AP department that does not encounter issues. When you set up your AP department, you must ensure that you have all the necessary documents in place. You will need to ensure that you have a contract with your vendors, a price list, and a form of agreement. In addition, you might also need to ensure that you have a contract with your employees. An efficient AP and AR process can lead to better financial reporting in the business. With better financial reporting, business owners can ensure internal and external benefits.
