The responsible use of credit in our everyday lives (think about your mortgage or car payment here), has become an important part of modern American life. In a business context, credit is a major reason why so many innovative ideas have the opportunity to succeed in the first place.
Credit provides vital resources for programs and ventures that otherwise would have lacked the necessary capital to get started. In this article, we discuss one type of credit, accounts payable, and briefly mention other types of payables – a term that we broadly use to refer to bills from a business’s creditors.
What is Accounts Payable?
Accounts payable is essentially money that is owed to suppliers, so keeping this number in check is a critical component of building a healthy business. Now, this term only applies when a business receives items from a supplier before actually making a payment, a process that is very common when it engages in a large number of transactions with any one particular vendor. The supplier is the creditor in this situation, as they’ve provided the business with goods or services in expectation of payment at a later date.
Understanding the Process
If the business fails to make timely payments on its debt, it's only going to cause more problems down the road (late fees, more stringent credit terms, etc.). A diligent process needs to be put in place to make sure that all vendors get their money on time; the steps of a smart process include:
- Processing the invoices vendors send in a timely manner
- Ensuring all bills are recorded in the general ledger accounts accurately
- Remitting payment before the due date to avoid late fees and penalties
Not remitting payments in a timely fashion will not only sour your relationship with suppliers, but could also ward off other potential creditors. For example, a bank will take into account all of your liabilities, including your payables, before deciding whether or not to loan you money. Loans are another form of payables too, sometimes referred to as notes payable.
When you keep your payables in check and you're never late making payments, the relationships you build with your vendors can become invaluable. You don't want to treat your suppliers like they don't mean anything, because they are a large part of your business and you quite simply can't achieve success without them.
Need help understanding payables, or with your business’s bookkeeping? Click the graphic below to learn how Lank, Johnson & Tull, CPAs can assist you today.