Poor accounting practices will kill your business. To keep the pulse of your business going, it’s essential to effectively manage the accounts payable portion of your accruals. Failure to track this accurately can result in inadvertently missed payments. It can even leave you with less money in the bank than you thought, putting you at risk of default or worse. If emergencies come up, spending money you don’t actually have could make the problem worse.
In this post, we’ll focus on accruals because the most accurate long-term accounting comes from the accrual method. This is because payments don’t come in and go out at the same time products and services do. This difference in the time of receipt versus the time of payment makes managing your accounting by cash flow alone less accurate. Accrual basis accounting, however, is much more difficult to keep track of. When you finish reading, you’ll understand how proper accounting can help your business:
- Prevent wasteful spending
- Avoid missing payments
- Streamline your payment process
Accrual Basis vs. Cash Basis in Accounting
What is the difference?
To define accounts payable accruals, we need to start with an overview of cash basis versus accrual basis accounting. As we said in the introduction, bills aren’t always paid as soon as services are rendered or products are delivered. Despite this fact, a large bill to be paid at a later date still affects your company’s financial picture. Cash basis accounting records a change only when the bill is paid, which doesn’t reflect reality very well. With accrual accounting, revenue and expenses are both recorded when they occur rather than when payment is made. Many small businesses will use the cash basis method of accounting, but most larger ones use the accrual method.
This gives you a clearer picture of your accounting. But it also makes things a little more confusing to keep track of and requires extra bookkeeping. For example, you could incur an expense at the end of the accounting period and pay for it the following month. It also means that credit and debit information for accounts receivable and accounts payable must be reconciled by adjusting entries when payment is made to ensure it matches with what was previously recorded.
Tips on Managing Accounts Payable Accruals
To further understand accounts payable accruals, let’s focus purely on expenses recorded under the accrual method. Some of these are consistent, ongoing expenses. The cost of utilities and the wages of employees that have not been paid yet are an example of these types of expenses. Goods or services provided by a third-party supplier may also be consistent and ongoing, but these are what we are talking about when we refer to accounts payable accruals. That is to say, accounts payable refers specifically to short-term debts owed to vendors.
Like accrued liabilities such as loan payments and wages, accounts payable count as current liabilities. But often, these types of payments can be harder to keep up with and reconcile than something like payroll or regular loan payments. Developing an effective strategy is important for avoiding running afoul of financial regulations. Let’s look at how a business can take steps to improve the accuracy of its accounting.
1. Verify the Accrual Invoice, Vendor, and Goods
Nearly everyone has had the experience of going through a drive-thru and getting home only to realize that the restaurant got the order wrong. Unfortunately, restaurants aren’t unique in getting orders wrong. When a vendor sends you the wrong items or the wrong number of items, you will potentially need to make another purchase to make up for the missing items. If you don’t catch the missing items in the first place, you’ll be paying twice for those items. You’ll also be recording accrued expenses for an item that you didn’t actually incur an expense for because it wasn’t received.
The first step of keeping accurate records for accounts payable accruals is to make sure that the expense you are recording matches what was actually received. Putting a system in place to verify every order will help keep your accounting accurate and your balance sheet reliable. It will also help keep your inventory and business operations that rely on it running smoothly.
Planning for this can be made more difficult when supply chain visibility is limited. The proactive delivery tracking in Order makes it easy for your staff to know when to expect deliveries for goods your company buys and plan for their verification. You can avoid having surprise deliveries and then having to push off verification until later.
2. Increase Scrutiny on Higher Invoices
If an invoice exceeds a certain amount, then extra scrutiny should be placed on it. Like the process of verifying the goods in the first place, this should be an automatic part of your accounts payable team’s day-to-day processes. Large invoices are likely to have a large number of items, which means an increased likelihood of an error on the part of the vendor. Alternatively, they are for very expensive items, which means small inaccuracies will result in big errors on your accrued expenses reports.
Keep your company’s balance sheet happy; take extra care to double-check large invoices to ensure the exact amount of goods ordered was received. The amount that triggers this will depend on your business and the types of transactions you are doing. For most businesses, any invoice over $1,000 is worth taking an extra look at to keep your financial statements accurate.
3. Standardize Invoices and Receipts
By merging all their vendors in Order, Mediaplanet saved 8.8% on sourcing.
Consistency of output requires consistency of input. Recording accounts payable accruals can easily get confusing if there’s no system in place to ensure that each invoice and receipt is translated into some standardized form. Without such a system in place, you are prone to errors, duplicates, or omissions. The Order platform makes this easy by providing you with a single platform from which you can monitor your incoming invoices and make payments to the vendors when the time comes. It allows you to do this regardless of the vendor’s preferred payment method, be it ACH, checking account, or a credit or debit card. By merging all their vendors in Order, Mediaplanet saved 8.8% on sourcing.
4. Review Accounts Payable Often
The regularity of loan payments and payroll makes them hard bills to accidentally forget to pay. But many of the invoices that come in under accounts payable will not be so regular. It’s important that you are continually looking over the outstanding invoices that you haven’t paid yet. This practice will help ensure that you don’t neglect your financial obligations and default on any of these bills.
Failure to properly do so is bad accounting practice. It could also jeopardize your relationship with your vendors and put your business at risk. Order can help here, as well. By putting all of your invoices into the same system, you can get an overview of what needs to be paid with a simple glance. You can even choose to make Order the vendor of record. Then you can consolidate your invoices and pay all of your vendors at once.
5. Segregate Duties
Everyone hopes there are no fraudulent individuals working in their organization. But the best way to ensure that fraud doesn’t happen is proper segregation of duties for accrued expenses. If the person verifying the accrued expenses, adjusting the entries, and signing off on the payments is all the same person, that employee has a lot of leeway to engage in improper conduct. It’s best practice to separate these duties so no one person can wreck the accuracy of your financial statements. In addition, a good accounts payable audit program will help to double-check everyone’s work.
One of the benefits of combining your vendors in Order is that you’ll have increased awareness of where the money is going. By doing so, CorePower Yoga was able to stop $50,000 in rogue spending per month.
The Bottom Line
The accuracy of your company’s income statement relies on accurately keeping track of your short-term liabilities. If these things are not properly tracked and reconciled, then your end-of-the-year financial outlook will not be an accurate reflection of how your business actually performed. Human error introduces a lot of possibilities for something to go wrong in the accounting process.
Order helps to automate that workflow and remove the possibility of human error. It helps you keep track of your expense accounts, liability accounts, and accounts payable and receivable. Would you like to learn more about how to manage your accounts payable accruals more easily and accurately? If so, then schedule a free demo with Order today.