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Guide to Best Practices for Accounts Payable A healthy working capital is very essential to any business. This is especially true for small or medium sized businesses. When you properly manage your accounts payable, it can be an effective strategy to free up and protect your working capital. If you want to manage your accounts […]

Guide to Best Practices for Accounts Payable

A healthy working capital is very essential to any business. This is especially true for small or medium sized businesses. When you properly manage your accounts payable, it can be an effective strategy to free up and protect your working capital. If you want to manage your accounts payable properly, consider these best practices.

Account payable policies and procedures document are very important to a business. The benefits of having a written policy is that it can facilitate employee training, help establish a consistent response to routine situations, and create a framework for appropriate delegation of responsibilities.

You should be able to identify duties that are incompatible and the appropriate segregation of these duties should be implemented. For example, if someone is assigned to authorize invoices for payments, he should not have the ability to edit vendor master files, and the same is true the other way around. The solution is to get someone to be appointed who is not involved with the process for accounts payables so that he can monitor changes to the files for master vendors.
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Where possible, purchases should only be made from pre-approved vendors. The reason for this is to be able to negotiate more favorable terms.
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When new vendors are added to your system, you should send them a welcome letter. You should inform the new vendors where to send invoices and any information that is needed to process vendor invoices such as the completed w-9 forms, which are needed for the annual preparation of form1099. You should comply with 1099 reporting since there is a hefty find for non-compliance.

The accounts payable department should receive all vendor invoices. There is proper recording made by the department before they are sent for approval. With this, invoices will no longer get lost or missing.

Do not enter vendor invoices as a batch. What you should do is to enter each invoice separately as this facilitates the resolution of variances and provide a better audit trail.

Specific procedures for processing vendor invoices should be established, and this includes assignment of invoice number (where vendor invoices are unnumbered or in case of internal documents such as employee expense reimbursement), and entering invoice numbers.

When the invoice amount is entered is should be entered as billed. Debit memos and adjustments should be posted as separate transactions as this facilitates account reconciliation and resolution of variances.

As part of new vendor set up procedures, default general distribution codes should be defined. There should be codes to all vendor invoices before posting. With this, there will be reduction in the possibility of errors.

A timely payment of vendor invoices is important and if there are available discounts, it should be taken advantage of. You can add up to significant cash savings with discounts, and if you make timely, consistent payment to invoices, it can help you avoid the outlay of cash for late fees and interest, and set the basis for the negotiations of better vendor terms.