To run your small business, you need money in the bank (cash flow) to pay your bills.
Accounts Receivable and Accounts Payable are two areas of your business that you manage to ensure that you have adequate cash flow to grow a successful business.
If you aren’t familiar with these terms, you can probably guess what they mean. Accounts Receivable is money your small business is waiting to receive from your customers. Accounts Payable is money to be paid by your company for products or services provided by a vendor. Now that you know the basics, let’s talk about how you can manage these to have a successful small business.
Great news: you've made a sale! Bad news: you haven’t collected money for it yet. Accounts Receivable are a regular part of running a small business, but you need to think about what works for your business. When your customer purchases something from you, there are terms such as: due on receipt, due in 90 days, or anywhere in-between. You need to find the sweet spot that allows your customers to purchase your products, but also allows you to have the cash flow you need to pay your staff, and purchase items that you need to run a successful business.
Collecting your Accounts Receivable is the other important part; do you offer the ability to use Square, PayPal, or online money transfer? When you send the reminder email, is there a link on the bottom for your customers to pay you? With technology today, there are lots of options to make collecting money easier than ever. Be aware that with online payment options, most of the fees are either to you or the client, and work that into your budget when you are figuring our your pricing model.
Just like you have customers that haven’t paid yet, you also have bills that you have received, but haven’t paid yet. These are called Accounts Payable, and you can use them to track the amount of money that you will need to pay your vendors in the near future. Knowing how much you have scheduled to come in as well as what you need to pay allows you to manage your cash flow.
Just like technology can help you collect money owed to you, you can also use it to make sure that your bills are paid at the right time, avoiding late fees or NSF fees that can eat up valuable profit from your business, never mind impacting your relationships with your vendors. Use pre-scheduled payments in your bank or other options to automate your payments as close to the due date as possible.
Accounts Receivable and Accounts Payable are a critical part of your business, and having systems in place to allow you to manage them is part of being a successful business.
Two quick tips for success:
Make sure you are talking with your customers, ensure they understand what you are billing them for and why, and confirm receipt of the invoice so there can be no confusion as the due date approaches. With your vendors, let them know you have received the bill, and will pay it at the appropriate time.
2. Document Everything
This will allow you to deal in facts and not feelings. Money can be a tricky thing, and if people feel that you are questioning them about money, they can react poorly. In a worst-case scenario, documentation will also be important should you have to pursue payment through a collection agency or court.
As you can see, both accounts receivable and accounts payable impact your small business significantly; it's wise to spend some time to clearly determine the way your business will handle both aspects.
Related Reading: What is Small Business Accounting and Why Do I Need It?
Want to learn more? Download "The Top 10 Bookkeeping Habits of Every Great Small Business Owner."