accounts receivable

Managing Accounts Receivable and Accounts Payable

For any small business, keeping a close eye on accounts payable and accounts receivable can be a challenging process. However, this is one key to helping your business run optimally, especially if your company handles hundreds or thousands of transactions on a regular basis. That’s because the gap between “what you owe” and “what you’re owed” helps to determine your cash flow, and the more cash your business has, the easier things are for you as the business owner.

In order to manage your accounts payable (AP) and accounts receivable (AR) more effectively, establish your credit terms upfront. This lets your customers know exactly how much time they have to make payments. For your best customers, the ones with good credit ratings or with a track record of paying on time, you can offer them more flexible payment terms. For other customers, you may want to limit payment terms to 15-30 days. Any more than that, and it could be hard to collect later.

And, in terms of accounts payable, it’s good to get into the habit of paying suppliers as soon as items arrive. You may even be able to get payment discounts for paying quicker. Letting payments pile up is a dangerous strategy as it could lead to a cash flow squeeze later.

Also, think about ways to streamline your transaction cycles. The shorter the transaction cycle, the more streamlined your workflow. To avoid bottlenecks and other difficulties, establish shorter receivables timelines so that you can quickly deal with your accounts payable. Get departments into the habit of issuing invoices, purchase orders and other documentation on designated days of the week or month to create a routine you can work with.

Next, you need to make sure that the folks who handle accounts payable are communicating regularly with the folks who handle accounts receivable. This may be difficult when you’re trying to keep on top of a large volume of transactions, but is absolutely critical if you want to manage cash flow effectively. The left hand, as they say, needs to know what the right hand is doing. For example, if there’s a spike in consumer demand, the AR team can signal the AP team to order more items and be ready for a surge in activity.

In addition, keep a careful eye on accounts that are long past due. You want to make sure that not too many of your accounts are aging. This means looking at old accounts on a regular basis to make sure that everything is being taken care of on schedule. Along those lines, set up a policy indicating the maximum period it should take to clear a customer’s account.

Finally, take advantage of automation to track everything. This speeds up the process of creating and managing invoices, drawing up shipping orders, tracking financial statements and managing the flow of all documentation. This can be a logistical nightmare if it’s all handled manually. But if it’s automated, you have a real-time view at how the business is doing. Using Spire, you have a window into real-time financial flows. And it’s also easier to assemble documentation and reports, as well as flag delinquent accounts and bottlenecks within the business.

So, remember, to optimize cash flow for the business, you need to manage accounts receivable and accounts payable. When they are working in harmony, your company will experience improved financial performance and you will have a big-picture view of how the company is faring.

5 Accounting Mistakes to Avoid

For small business owners, it’s easy to assume that the accounting process will somehow run itself — as long as the business is making money, there’s not much to worry about, right? Wrong. There are 5 common accounting mistakes that small business owners typically make that could curtail the growth of your business or leave it in a vulnerable financial condition.

Here are the top five mistakes to avoid:

Mistake #1: Failing to track accounts receivable

In order to get paid on a timely basis, you have to track your receivables. This may be easy enough if you only have a few customers, or if most of your customers pay upfront using cash. But what if the payment terms drag on for 30, 60 or 90 days? You need to have a process in place to track the aging of those receivables.

That means you continually need to check your list of receivables to see which customer balances are still outstanding. As soon as any payment is received, you need to be applying this amount against the invoice, to show that it is being paid. At the end of every quarter or during tax season, this makes it easier to reconcile any customer deposits still sitting in your revenue account. This is where Spire can help, by automating the receivables process.

Mistake #2: Not keeping expense receipts

Failing to save expense receipts can lead to a series of tax and accounting problems later down the line. It’s especially an issue with smaller amounts — think less than $100 — since at the time, this amount may not seem like a lot. But these amounts really add up. Later, you’ll have a hard time figuring out whether the expense was related to, say, meals, supplies or equipment.

As a result, you should save a receipt of every purchase. You can also take other steps, such as only using a business bank or credit card to pay for business expenses. This makes it easier to draw up an itemized list of expenses.

Mistake #3: Failing to record cash expenses

Cash is king, but it can also be an accounting nightmare. While credit cards, debit cards, and cheques are easily linked into your accounting software, it’s easy to overlook expenses paid in cash. As a result, you need to develop a method for tracking cash expenditures.

Mistake #4: Doing your own taxes

Small business owners should really hire a professional to handle their taxes. You may not claim all the deductions you qualify for, or you might underpay your tax bill, all of which could result in penalties and other fees. The money you think you’re saving could disappear. Plus, tax professionals can keep you updated on changing tax laws, or help you find ways to reduce your tax burden.

Mistake #5: Failing to understand the business implications of accounting terms

Most business owners only carry about the profit and loss of the business. Thus, accounting terms like EBITDA and tax loss carry forwards may have very little meaning for you. But you have to understand the business implications of these accounting terms — how do they impact cash flow or profitability? If the jargon and buzzwords are too daunting, it may be time to switch to another accounting professional who can explain in plain, everyday terms how you can maximize financial success of your business.

Need More than Basic Accounting Software?

Having basic accounting software is fine for a new business startup, but you’ll need a complete solution as your business grows. Expanding businesses require software that can handle a flood of invoicing, and a large payroll. As taxes become increasingly complicated, management needs more detailed reports in order to create a budget for the upcoming year. A complete accounting software package is needed to ensure the successful running of your company.

Generally, accounting software will include modules that smaller businesses need, such as general ledger, accounts payable, accounts receivable, and payroll tools. The software should also be able to produce standard reports and income statements. There may be options to filter and track custom data fields as well. While this software is great for the new business start-up, something more advanced may be required for an established business.

The best accounting software should have more advanced features. Reporting and analytics are important for a larger firm. Some programs include preconfigured reports. These can easily be altered with custom data fields. Customized reports can be produced as required. With good accounting software, detailed analytics can be made so that your business can be taken to the next level. Management will be able to assess which ventures to focus on. Accounting software should be able to quickly generate reports and statements, sorting through data to find pertinent information.

Most accounting systems will manage the payroll, whether an employee is hourly, salary, or commission-based. An accounting system will accurately calculate the taxes due and keep track of them for each employee. More advanced systems can handle either cheques or direct deposits, as well as providing yearly tax forms. The more employees you have, the more likely you will need a complete accounting software solution, rather than trying to work around your basic accounting program, which can lead to frustration on the part of your accountant.

If you have a large online store, or brick and mortar shop, chances are that at some point, you’ll need advanced business accounting software tools. Every aspect of your inventory can be electronically managed. It can manage purchase orders, including receiving POs, track all shipping, and recommend reordering stock. Intricate details can be managed such as history, bill of materials, serial numbers, and even bar coding.

Good accounting software will be adaptable to your business’s needs. Basic accounting software will only be able to handle the payroll for a limited number of employees. Good software should not be obsolete when you have 200 more employees. It should scale up to your requirements. Software may be available for your specific industry, organization, school or government branch.

It’s also important that accounting software allow for multiple users. More than one employee should be able to use the accounting software. Nothing is more frustrating than having one employee enter data, while someone waits over their shoulder for them to finish. Productivity and time can be lost while one employee waits for another one to complete a task. Search for software that allows several users to access it at any given time.

Look for accounting software that provides a variety of add-on modules, as well as working with other third-party software systems. Document managers, time-clock software, expense tracking and other solutions may be warranted. Credit card processing, as well as data backup management of accounting data may be required. When you have all your software working together in one package it’ll increase productivity. If you’re currently using multiple software packages you may you’re wasting a lot of time importing data from one software to another. A good accounting software package will streamline your data all into one accessible location.

A comprehensive accounting system should handle more than the basic tasks. You need a complete accounting program solution that includes reporting, payroll, and inventory control. Also look for packages that are adaptable as your business grows, whether through additional modules, or unlimited usage. A good accounting software package will grow with your business, helping you to maximize business profits.