Accounts payable (AP) are amounts owed to vendors or suppliers for products or services not yet paid for.
The total of all outstanding amounts owed to vendors is the accounts payable balance on the company’s balance sheet.
The cash flow statement shows the increase or decrease in total AP from the previous period.
To improve cash flow outstanding payments should be paid close to their due dates.
Accounts payable ensures there is enough money flowing into the firm to cover invoices and, ideally, have some cash leftover. You must track your payables to manage your cash flow effectively.
Managing accounts payable helps with budgeting for upcoming bills, identifying ways to negotiate better terms with vendors and suppliers and motivating customers to pay their invoices on time. It can also shorten the amount of time it takes to collect past-due accounts.
Type 1 – Wrong Amount
Checks that clear an account must be legible and match exactly what was handed over, which is why it’s essential to double-check before making any accusations.
Type 2 – Double Payment
For example, a mistake in a purchase order number might result in two invoices being generated for the same product.
Double payments can also come from human errors, such as forgetting to record an invoice as paid. These issues can have a considerable impact on the business, not to mention supplier dissatisfaction when you request a refund.
Type 3 – Data Entry Errors
A significant difficulty with accounts payable is incorrect data entry. It’s difficult to track employees who have not exchanged a purchase order (PO) number or the amount payable when manually entering data.
Errors are unavoidable when your business relies only on manual data entry.
Type 4 – Sending Payment Before Delivery
During busy periods, employees may accept payment for invoices as soon as they receive them, without first ensuring that the product or service has been delivered.
If you’ve already paid for a package and it comes damaged or is missing items, coming to a solution can be difficult. When AP is separated from other departments, there is no free flow of information across teams, and such issues become frequent.
Type 5 – Disappearing Invoices
If you fall behind on invoice processing, you risk losing track of invoices. Incoming invoices may be permanently lost or temporarily misplaced. In any case, if you can’t maintain track of your information, you’ll find yourself slipping further behind.
The AP department will have to spend time contacting suppliers to generate updated invoices that are permanently lost. If they don’t notice the missing invoices, you’ll have to deal with suppliers asking why you haven’t paid yet.
Accounts Payable Errors: The consequences
Errors come at the cost of:
- Unnecessary financial expenses
- Time
Financial expenses occur when money is spent when it should not be.
Overpayments, double payments, and invoice payments cost money.
It’s time-consuming for employees to look for details that aren’t in your purchase order system. Instead, they must manually investigate what happened with invoices, purchase orders, and other transactions.