What Is the Accounts Payable Process? Understand It in 3 Steps

Michael Pignatelli
Jul 13, 2022

Any ecommerce business owner or manager should know their short-term debts, also known as accounts payable. What is “accounts payable”? This is the process of paying what your business owes, and it's something you can't afford to get wrong. 

By implementing a sound accounts payable process, you can improve your online business’s cash flow, your relationship with your suppliers, and overall financial health. In this blog post, we'll take a closer look at the three steps of the accounts payable process and explain how each can help your business succeed. Are you ready to improve your business? Let's get started!

3 Key Steps in Tracking Accounts Payable 

For businesses, accounts payable (AP) is a current liability in the balance sheet. That's because AP represents the money your business owes to suppliers and creditors for products and services purchased on credit.

Given this, online businesses must manage AP effectively and responsibly. After all, how well you handle AP can impact your company's ability to obtain future financing and maintain supplier confidence. By following these steps, you can help ensure that your business can meet its financial obligations and maintain supplier confidence.

#1. Create Your Chart of Accounts 

When setting up your AP process, coming up with charts of accounts is the first and most important step. A chart of accounts isn't a visual aid for forecasting or sales. Instead, it's a listing of all the different types of income and expenses that your business has. This might include everything from rent and salaries to marketing costs and inventory. 

Having a good chart of accounts is essential for two reasons. First, you can monitor your finances in one place. Second, it will make it easier for you to prepare financial statements and report your income and expenses to the IRS. 

So how do you create your chart? The first step is choosing the types of income and expenses you want to track. Then, you'll need to assign each type of income or expense its account number. Once you've done that, you can start setting up your accounting software to reflect your chart of accounts. 

#2. Enter Vendor Invoice Details

Entering supplier invoices can be time-consuming, but it's important to get the details right to maintain accurate financial records. Here are some tips for entering supplier invoices into your accounting system:

  • Be sure to include all the relevant information for each supplier, including contact details and account numbers. This will help you to track payments easily and reconcile invoices.
  • You should clearly state the line items on the invoice, and code to the correct general ledger (GL) account. This will ensure that the invoice is allocated to the correct cost center in your accounts.
  • Amounts should be entered accurately in both the local currency and in USD. This will avoid any conversion errors when the invoice is processed for payment.
  • You should also indicate the payment term that you and your vendor agreed on. The most common payment terms are "due on receipt," "net 10," "net 30," and "net 60." These terms indicate when the bill is due and how many days the company has to pay the invoice.

#3. Review and Process Payment 

If you don’t have an accounts payable department, this task will be handed down to your accounts payable specialist. So, what is an accounts payable specialist? Accounts payable specialists are responsible for processing purchase orders, inputting invoice details, and ensuring that your supplier is paid in a timely manner. 

Your specialist will be normally handled by you or an AP manager. What is an accounts payable manager? They can help keep cash flow moving smoothly, preventing bottlenecks and delays that can disrupt your business. 

There are a few different ways you can pay your supplier, from writing a cheque to using an electronic payment method such as Automated Clearing House (ACH). 

Writing a cheque is the simplest way to pay a vendor, but it requires you to have enough cash on hand to cover the amount of the cheque. If you don't have enough cash, you'll need to either get a loan or take money out of another account to cover the cheque. 

Processing cheques from your accounting software is a bit more complicated, but it can save you time and money in the long run. Paying your vendors with a company credit card is another option, but you'll need to make sure that you're using a card with a low-interest rate.

Lastly, using an electronic payment method like ACH is fast and easy, but it may cost you more in fees. Ultimately, the best way to pay your vendors will depend on your situation.

Importance of Accounts Payable With Business Relations and Cash Flow

what is an accounts payable - A happy supplier looking at his sheet while talking on the phone

Accounts payable might be short-term liabilities, but they can ruin a business if not properly handled by your accounts payable manager. What's the adverse effect of not having an effective accounts payable process? It can destroy your budding relationship with suppliers.

When suppliers are constantly chasing payments, there is a big chance they won't make future dealings with you. They may also start charging late payment fees or higher interest rates. Plus, paying bills late can damage your business's credit rating, making it more difficult and expensive to borrow money in the future. This also damages your relationship with creditors.

When managed effectively, accounts payable can improve a company's cash position by timing payments to coincide with cash inflows. This can be particularly helpful for businesses with seasonal or irregular income patterns. Plus, businesses can improve their cash flow by taking advantage of early payment discounts. 

Accounts payable can also help businesses to better manage their inventory levels by ensuring that they only purchase the necessary materials and don't tie up too much capital in inventory, as this can damage the overall financial health of your business.

Final Thoughts 

Managing your debts is critical to your online business, big or small. The prompt and accurate payment of invoices is essential to maintaining supplier relationships, avoiding late fees, and ensuring a healthy cash flow. 

Given the importance of accounts payable, it's not surprising that ecommerce business owners are increasingly looking for reliable technology to help manage the process. But even with the advanced accounting software, you still need accounts payable specialists to set up your accounts payable and make error-free payments. 

Start making stress-free payments with Unloop by booking a call today!

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About unloop
Unloop is the first and only accounting firm exclusively servicing ecommerce and inventory businesses in the US and Canada. With the power of people and technology, our team dives deep into COGS and inventory accounting.. You are paired with a dedicated bookkeeping team that prepares accurate financial statements, financial forecasts, and can also pay bills or run payroll for you. Come tax time, everything is organized and ready to go, so you don't need to worry. Book a call with an ecommerce accountant today to learn more.
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