Tracking What Your Clients Owe – Accounts Payable

Whenever I meet with a potential client for the first time, I always start off by asking two simple questions: “What are some pain points in your business?” and “What do you want from your accounting system?”

Accounts Payable

When I asked these questions in my most recent meeting, the client answered by saying he has no idea how much he owes his vendors, or when those payments were due. Currently, they just record a check, posting it directly to the expense or liability account.

This reminded me that not all business owners and bookkeepers understand the many benefits of entering bills as accounts payable. Even if the reporting method is cash basis, Accounts Payable can still be used as a way to track what is owed and when it’s due.

Benefits of Using Accounts Payable

There are several great benefits to using Accounts Payable for your clients. As mentioned previously, when bills are entered into the accounting or business class bill pay system (we recommend, you will have the ability to view reports such as the ones listed below. In addition to showing how much clients owe their vendors, and when the payments are due, this makes it much easier to forecast their cash needs so they can plan accordingly.

Recommended Accounts Payable Reports

  • Unpaid Bills – This is a list of bills that haven’t been paid, or bills that have been partially paid. Generally, this report also includes the payment due date.
  • Accounts Payable Aging – This is a display of unpaid bills and the timeframe that they are due or overdue. Many systems offer the option to view either a detail or summary report.

Another valuable benefit of using accounts payable, rather than posting payments as checks, is that the financial reports will display more accurate information. The expenses will show as of the date they were incurred, instead of the day they were paid. Here is an example of how this process affects your client’s financials:

Scenario 1 –  Posting bill payments as checks

Let’s say your client’s January Phone bill is $250.00. They had a slow month in January and cash flow was tight, so they waited until February to make the payment.

When the February phone bill for $250.00 arrived, your client paid it right away since their cash flow was looking better and didn’t want to forget about it.

The profit and loss report would show a $500.00 phone expense in February – even though that was two months of bills – and $0.00 in January.

If this is similar to other expenses in the financial report, it’s going to look like the more profitable month (February) is the least profitable, because the previous month’s bill was paid when your client had the money.

Scenario 2 –  Entering bills as accounts payable

The January phone bill for $250.00 is dated for January 15th and entered into Accounts Payable.

The February phone bill for $250.00 is dated for February 15th and entered into Accounts Payable.

This would show a $250.00 phone expense in January, and another $250.00 expense in February, regardless of when the payment was made. This offers a clearer picture of their business performance, allowing for more accurate planning and forecasting.

How to Properly use Accounts Payable

To ensure that your clients get the desired results as explained above, make sure that the information is entered properly. Below are some key points to keep in mind when entering bills into the system.

Vendor: Make sure the vendor information in the system is complete and accurate. This includes the remittance address, email address, and account number. If printing checks from your accounting system, make sure the account number is included in the check memo line. This ensures the payment gets properly posted to your client’s account. If using an electronic payment processor, the same rule would apply.

Tip: if there are multiple accounts with the same vendor, we recommend a separate vendor account for each account – include the last 4 digits of the account number at the end of the vendor name for easy identification.

Date, terms and due date: When entering bills, the date entered should be the date that appears on the bill. For credit card statements, this would be the statement ending date. The due date should be entered as it appears on the bill, or calculated based on the terms.

Tip: If the bill does not list terms or a due date, we use Net 30 as our default terms.

Amount: We strongly suggest that you ALWAYS enter the amount as shown on the bill. This makes it easier when researching information later. If an item was returned, received, defective, or there was an overcharged fee, contact the vendor and ask them to  issue a credit memo. Once the Credit Memo is received, it can be applied to the balance due on the bill.

I hope this information helps you to explain the the benefits of using the accounts payable process to your clients. If you are looking to help them streamline their system, or add an accounts payable system, contact Think Leader Consulting to learn how we can help.