Home » Avoid Running Out of Cash » Paying Your Bills

Manage Accounts Payable and Predict
Your Spending and Cash Flow

Bills are an inevitable part of running a small business. Whether it’s paying suppliers, settling utility costs, buying stock or making rent, you’ll always need to spend money to make money. Understanding, planning for, tracking and paying your bills is known as “accounts payable,” and it’s a vital concept for ensuring your business doesn’t run out of money. We’ll explore what accounts payable is, how to manage it and share some tips for staying on top of your finances. You’ll never fear the overdue bill again!

Why Paying Your Bills on Time Matters

Surely it doesn’t matter if you’re occasionally overdue with a bill, right? Wrong. It can matter, and here’s why:

It indicates poor financial management

If bills are regularly being paid late and you’re constantly getting reminders, it’s likely you are not on top of your finances. That can be bad for your cash flow, profitability and budget.

You need to know what you owe

Accurate accounts payable record-keeping is essential to understanding your current finances. This information also flows through to your balance sheet and financial statements, which can be vital for understanding the overall health of your business — and ensuring you never run out of cash.

You might get charged interest or late fees

There can be penalties for not paying your bills on time, which will just add to what you owe, increase your costs and lower your profit margins.

You might get charged interest or late fees

Repeated late payments can damage relationships with vendors, suppliers and others. Eventually, they may decide to stop working with you, which can be catastrophic if their products or services are crucial to your business.

You might get charged interest or late fees

Businesses have credit scores just like people. If you don’t pay your bills on time, that can damage your credit score, making it difficult for you to get loans and other financing in the future.

Understanding Accounts Payable

Accounts payable is a section of your accounting system. You can use it to: 

  • Record bills as they come in: Include who they are from, total amount and date due
  • Record amounts that you are expecting to be billed for: When you order from a supplier, you might enter the amount due into accounts payable
  • Track regular, repeat payments: These can include subscriptions or memberships 
  • Understand when payments are due: Use this system to remind you to make payments

On May 1, a bill comes in to your business, Blue Widget Co. from your materials supplier, Proper Plastic Perfection. The bill is for $2,800 and is due to be paid within 30 days. You enter the bill into accounts payable, with a reminder to pay the bill on May 31. When May 31 arrives, you pay the bill, which removes it from accounts payable.

Here are a few important points to understand about accounts payable:

It’s Not for Amounts You Pay Immediately
You only use accounts payable if you receive goods or services that you haven’t paid for yet. If you pay right away, there’s no need to record anything in accounts payable — although you will of course want to make a note of the expense elsewhere in your accounting system.

It’s Only for Short-term Debts
You don’t use accounts payable to show longer-term debts. Accounts payable is for bills you have that are due to be paid over a fairly short timescale.

The Total of Your Accounts Payable Debt Impacts Your Business Liabilities
Businesses typically have three main areas of their balance sheet: 

  • Assets: The amount of money currently in the business
  • Credits: The amount of money you are owed by others (uncollected revenue), also known as “accounts receivable”
  • Liabilities: The amount of money you owe to others

The liabilities section of your balance sheet is where the total amount of debt in accounts payable will be recorded.

Your Accounts Payable Is Another Company’s Accounts Receivable
The opposite of accounts payable is accounts receivable. That’s where businesses record the money they are owed from others. When a business sends a bill out, it is added to their accounts receivable as money they’re expecting to get. When it arrives at your business, you enter it as accounts payable. The same thing happens in reverse when you send a bill or invoice to someone else.

Paying Bills Removes Them From Accounts Payable
Accounts payable only shows your outstanding debts. When you pay a bill, it is removed from accounts payable and becomes a recorded expense elsewhere in your accounting system.

Managing Accounts Payable and Settling Your Bills on Time

Here’s how to stay on top of your bills and manage your accounts payable.

Use Accounting Software

Trying to manage your accounts on paper or using an Excel spreadsheet can be a nightmare. Invest in good online accounting software that lets you easily enter bills, invoices and other expenses. It will save you lots of money, time and anxiety, plus it will help with tax preparation and keep your accounting fees down overall.

Enter Bills as Soon as They Come In

Don’t delay on entering bills. Set aside some time each day to record any bills in your accounting software, including how much they are for and when they’re due.

Create Automated Payments or Reminders to Pay

Some systems let you set up payments in advance so bills are settled when they come due. If that’s the case for a bill, go ahead and create an automated payment. If you can’t do that, create a reminder to pay the bill when it comes due. You might even want to pay bills early since that can enhance your business credit score.

Review Accounts Payable Regularly

You need a day-to-day understanding of the assets, liabilities and other financial areas of your business. It’s important to know what you owe and to whom, so review your accounts payable every few days.

Watch Your Cash Flow

It’s vital to stay on top of your cash flow and have enough of a buffer to pay all your expenses. Regularly review what you owe compared to the money you currently have in your business to ensure you can pay all your bills. If you’re running out of money, review our guide to business profitability for help.

Reconcile Bills Against Your Budget

You should have already created a business budget to help you stay on top of your finances. When bills come in, make sure you reconcile them against your budget and tweak it so you’re always in control.

What to Do If You Can't Pay

If you're short on money to pay your bills, don't ignore things and think they will go away. Instead, contact your creditor and explain the situation. Many creditors will be sympathetic and may let you work out a repayment plan or give you longer to pay. If you find you're running out of money on a frequent basis, it's time to take a long, hard look at your budget to work out how you can save money elsewhere.

Having a good accounts payable system will help you pay vendors on time and can improve your business credit score by always making payments reliably.

Read More About Cash Flow

Our Most Frequently Asked Questions About the Economic Injury Disaster Loan (EIDL)

The Coronavirus Aid, Relief, and Economic Security (CARES) Act includes two solutions for small business financial relief during the COVID-19 Pandemic: the Paycheck Protection Program, which ended August 8, and the Economic Injury Disaster Loans (EIDL) program. Since March, we’ve been able to provide businesses with an online application platform for the Paycheck Protection Program […]

By grant