Accounts payable management: strategies for managing them effectively

Knowing a company’s precise financial status is essential when it comes to securing partners and investors and assessing potential future decisions. Against this background, effectively managing accounts payable is a vital component that tracks what debts are outstanding with suppliers for a more accurate picture of the company’s financial situation.

What are accounts payable?

Accounts payable refer to the outstanding debts that a company owes to its suppliers, that is, all the business debts that a company has and has not yet paid. Essentially, they work like credit, except that they are interest-free, since banks do not intervene in these transactions, but rather it’s the suppliers themselves that provide these “loans” so that the companies can more easily conduct their business. Thus, in many cases, companies purchase goods, products and services in advance, agreeing to pay the corresponding amount within a deadline established in advance with the supplier.

Accounts payable are usually included in the current liabilities of a company’s balance sheet since these debts are generally payable within a short period of time. That said, there are two different types of accounts payable, depending on their due date:

• Short term. Debts that must be paid in a period of less than 12 months.
• Long term. Debts with a repayment period of over 12 months.

These payables can also be classified by the nature of the debt, which can be divided into two different categories:

• The money a company owes its vendors for inventory-related physical goods.
• The money the company owes for the purchase of goods or services that are invoiced, such as advertising or office expenses.

Accounts payable and accounts receivable are two opposite concepts of business accounting, since accounts receivable is the invoices and payments a company is entitled to get from its customers for the goods or services it has provided. Managing accounts payable correctly is vital for protecting a company’s solvency and a cornerstone of efficient financial planning, which reliably reflects not only the company’s receivables, but also its payment obligations.

Managing accounts payable

Accounts payable can include everything from the purchase of inventory or office supplies, rent and advertising services to basic maintenance services like electricity, light and internet. These types of debts have a direct impact on a company’s cash flow, an indicator that shows the movement of money in and out of a company that has occurred over a specific period of time and that provides a snapshot of a company’s financial status. They can also have an impact on supplier relationships and the brand’s own reputation, so it is important to manage them efficiently.

When managing accounts payable, companies should remember that this process is not limited to paying the corresponding debt but rather begins the moment the purchase order for a good or service is completed. This purchase order must include the buyer and seller details, invoicing and delivery information, the date and number of the purchase order and a description of the good or service purchased, as well as the signatures of the departments involved in the purchase. Once executed, the department responsible for the company’s accounts payable management needs to follow up on the process:

• Once the purchased goods or services have been received, a delivery report should be prepared that describes when and in what condition the product was received.
• The supplier’s invoice should be validated once the delivery has successfully been verified. In this case, it is important to ensure that this receipt accurately and truthfully reflects all information related to the purchase.
• After the invoice details have been verified, the company’s general ledger accounts should be updated to include this transaction, which should be entered as an expense.
• The payment order should be issued before the invoice due date to clear the outstanding debt to the supplier.

Internal controls to prevent potential errors are highly recommended in efficient accounts payable management. Moreover, we also suggest handling the entire process digitally to optimise resources.

Accounts payable turnover

There is a concept that can help with managing a company’s accounts payable: the average payment period, an indicator that shows investors how many times per period a company pays its accounts payable.

This indicator provides insight into a company’s solvency in dealing with its outstanding debts and can be useful in improving or detecting possible flaws in accounts payable management. It also provides additional details on the company’s financial situation. The following formula is used to calculate it:

Average payment period = (Average accounts payable balance/Total purchases) x 365

For optimal cash flow, the average payment period to suppliers needs to be longer than the average collection period from customers, that is, the time it takes for companies to receive payment from their customers should be shorter than the time it takes to settle their debts with suppliers, otherwise the company may have a problem with cash flow.

‘Confirming‘: a reverse factoring tool for managing accounts payable

When dealing with accounts payable, there is a financial instrument that can help both buyers and sellers improve their cash flow: a type of reverse factoring called ‘confirming‘ in Spain. This is a financing formula that allows companies to delegate supplier payment management to a bank, which takes control of the payment administration processes.

This approach can help companies, particularly startups, better optimise their time and capital and to streamline their account management by placing the control of their accounts in the hands of professionals. It also ensures that suppliers are paid for their services on time, potentially enhancing brand trust and reputation and attracting potential investors.

BBVA Spark’s financial solutions for users include a confirming service, through which companies and entrepreneurs can transfer the management of their accounts payable to a team of professionals and boost their growth within the ecosystem.