Avoid Vendor Payment Issues - Tips for Small Business Owners

No one wants to be labeled a bad debtor, nor do they want to face the awkward question, "Where's my money?" Beyond the embarrassment and potential concerns about your business’ stability, managing your cash flow is essential.

Cash is king, and how you handle it will determine your success. Part of this involves knowing who you owe and when to pay them. Keeping up with your payments and maintaining good relationships with your vendors is crucial. After all, your vendors are an essential part of your value chain. You need them to run your business smoothly, and if you don’t pay them on time, you’re putting your business at risk.

Now, I’m not saying you should pay every invoice that you are faced with blindly. There are ways to avoid vendor payment issues. One key strategy is having an effective accounts payable system.

How To Effectively Manage Your Accounts Payable

To effectively manage your accounts payable and keep your vendors happy, remember the acronym “PRIMA”.

Purchasing - This involves ordering goods and services from your vendors. Make sure you create and manage purchase orders to control costs and prevent unauthorized spending.

Receiving - Always verify and record the receipt of goods and services. This step ensures you only pay for what you’ve received and that everything meets your standards.

Invoicing - Handle incoming invoices by checking their accuracy, matching them with purchase orders and receipts, and entering them into your system. This helps prevent errors, discrepancies, and you being ripped off.

Money - Schedule and execute payments to your vendors. Choose the right payment method and ensure timely payments to maintain good relationships.

Audit - Regularly review, analyze, and reconcile your accounts payable records with your general ledger. This helps identify and correct any discrepancies.

The Importance of Creating a Purchase Order

When it comes to running your small business, every transaction counts. One of the best practices you can adopt, no matter the size of your business, is creating a purchase order (PO) for every purchase.

You might think that purchase orders are only applicable to bigger companies, but they are incredibly valuable for small businesses too.

Here’s why…..

A purchase order is a document that clearly outlines the specifics of the goods or services you are ordering. It includes the following key details:

Specifications of the goods or services, detailing the exact type and quantity of what you're purchasing.

Agreed-upon price, which helps prevent any surprises when it comes time to pay the bill.

Terms and conditions of payment, including when and how you will pay for the goods or services.

A PO ensures that both you and your vendor are on the same page. It minimizes misunderstandings and errors, ensuring that you get exactly what you ordered. It serves as a legally binding document. If there are any disputes about what was ordered or the price, the PO can serve as proof of the agreement.

Additionally, by detailing the agreed-upon price and payment terms, a PO helps you manage your cash flow better. You know exactly what you owe and when it’s due, which is crucial for maintaining healthy finances.

To add for record-keeping purposes, having a PO can save you a lot of headaches when it’s time to reconcile your accounts.

I know many businesses, large and small alike, use a signed version of the quote presented by the vendor instead of a PO.

This I don’t recommend. Here’s why……

A quote is an estimate provided by a vendor of how much goods or services will cost. It’s not binding and doesn’t indicate that an order has been placed. The vendor is not mandated to any terms including the price stated.

A purchase order is a formal order issued by the buyer (you) to the vendor. It’s a commitment to buy the goods or services at the specified terms. Once the vendor accepts the PO, it becomes a legally binding agreement.

If you want to prevent misunderstandings, I suggest you get in the habit of creating a purchase order.

The Importance of Maintaining an Accounts Payable Sub ledger

 What is an Accounts Payable Sub ledger?

An accounts payable sub ledger is a detailed record of all the amounts your business owes to its suppliers and vendors. It provides a breakdown of each transaction, including the names of the vendor/suppliers, the amounts owed, due dates, and any payments made. A sub ledger is a crucial part of your accounting system as it helps you keep track of your outstanding debts and manage your cash flow more effectively. When you implement a payables sub ledger system, at any given time you can see the history of any one vendor.

In times of scarcity or even general planning, wouldn’t you want to know your options in quick order??

 Why is it Important?

As a small business owner, you might not immediately recognize the value of maintaining an accounts payable sub ledger. However, its benefits are significant.

Firstly, it provides you with detailed tracking. The sub ledger helps you track each transaction with your vendors, ensuring you know exactly who you owe and when payments are due. This prevents any overlooked invoices or missed payments.

Secondly, it helps with the accuracy of your financial records. By maintaining an accurate sub ledger, you ensure your financial statements are not misleading and up-to-date. This is essential for making informed business decisions.

 How to Maintain an Accounts Payable Sub ledger

So, you might be thinking, "How on earth do I keep this accounts payable sub ledger in check?" I’ll admit, it could become cumbersome without utilizing an accounting software. Having an accounting software will streamline the process. Regardless, this is what you must do to maintain an accounts payable sub ledger.

 1.     Set up each vendor - start by setting up each vendor as a separate entity in your sub ledger. The entity you are trading with is the most important factor here. Yes, it’s good to have information about your main representative at the business, but the vendor is the entity you are legally transacting with? Who is the contract with?

2.     Record every transaction -  enter every invoice and credit note received from vendors into the sub ledger, including details like invoice number, date, amount, due date, and payment terms.

3.     Regular updates - keep the subledger updated with payments and credit notes applied. Make sure to match the payment/credit notes to the relevant invoice. Avoid deleting transactions; if possible, reverse them with an adjusting entry. Always maintain an audit trail.

4.     Reconcile regularly - frequently reconcile the subledger with your general ledger to catch any discrepancies early and maintain accurate financial records. With accounting software (if properly setup), your general ledger and sub ledger should be recorded synchronously; the reconciliation is just an added check to ensure everything is in order.

I know it sounds like a lot, but an accounts payable sub ledger is a vital tool for any small business. It helps you stay organized, maintain accurate financial records, manage your cash flow, and build strong relationships with your vendors.

Taking the time to set up and maintain this sub ledger will pay off in smoother operations and a more stable financial position for your business.

In the hustle and bustle of running a small business, it’s easy to overlook the finer details of financial management. But as I’ve come to realize, these details although monotonous are the building blocks of success. From the timely payment of invoices to the meticulous upkeep of accounts, every action shapes the financial landscape of our businesses.

 The views reflected in this newsletter are those of the author and do not necessarily reflect those of Aegis Business Solutions, its partners, or any affiliated companies.

Found value in this article? Share it with your friends! In my next issue, we’ll discuss how to maximize your cash flow by adopting the best invoicing practices. Have a topic you want me to cover? Feel free to message me.

Until next time, cheers to your ongoing success! 😊