To run a successful e-commerce business, you need to understand important financial concepts, such as current assets and current liabilities.
Current assets include cash and cash equivalents, inventory, and prepaid expenses. Current liabilities include accounts payable (A/P), short-term debt, and income tax payable.
This article helps you understand what accounts payable is and tells you the best accounts payable practices for your e-commerce business.
Key takeaways:
- Accounts payable is the amount your business owes to vendors or suppliers
- Managing accounts payable is a detailed process but keeps your business finances in order
What Is Accounts Payable?
Accounts payable is the amount you owe to creditors or suppliers. For example, if you bought goods on credit with net 90 payment terms, you’re liable to pay the supplier within the next 90 days. During the time between the purchase and the payment, the liability is classified under the accounts payable section of the balance sheet.
How Is Accounts Payable Different From Accounts Receivable?
Accounts receivable (A/R) is the exact opposite of accounts payable. Accounts receivable represents the amount that’s owed to your company by other firms. This may be for services rendered to them or for products they have purchased on credit from your company. For accounting purposes, accounts payable is noted as a liability for your firm but accounts receivable is considered an asset.
How Does Accounts Payable Affect Your Small Business?
Keeping track of accounts payable is extremely important for a small business owner. Since your business has taken a short-term loan, you need to repay the loan on time to avoid having your company be classified as a defaulter. Paying off your accounts payable dues on time can also help you maintain better relations with your suppliers. This may translate into better deals and discounts for future purchases.
Understanding your accounts payable transactions can also help you gauge the health of your business and forecast future cash flows. If a company’s payables increase over a period, it implies that the business is purchasing more goods and services on credit. Similarly, if a firm’s payables decline, it indicates that the company is repaying its debts faster than it’s buying on credit.
What Are Some Examples of Accounts Payable?
Some common accounts payable transactions made by e-commerce businesses include:
- Short-term loans: You might need to take short-term loans for research and development, to launch new products, or to get through a tough phase— regardless of what you take the loan for, it’s classified under short-term loans.
- Invoices for purchases: Businesses frequently need to purchase office supplies, packaging materials, equipment, and other goods for their day-to-day functioning. For these transactions, the purchases are often not paid upfront, and the supplier sends an invoice for payment.
- One-time service fees: This includes payments due to contractors and consultants. Often, their payments are due after the completion of the task and, therefore, this is accounted for as accounts payable.
- Internet services and web hosting: Most e-commerce businesses need a reliable hosting service with a 99.99% upkeep time. Depending on the size of the business, the business may also need strong servers and databases. However, the payments for these services are usually made every quarter, and so these are classified under accounts payable.
How Do You Manage Accounts Payable?
Managing your accounts payable is a time-consuming and detail-oriented process. However, it can be made simpler by referring to the points listed below.
Track Every Payment Carefully
You need to ensure that every due payment is accounted for in your books or expense management software. To do this, you need to keep three main points in mind:
- How much do you owe?
- Who do you owe the amount to?
- When is the payment due?
It may help to set up recurring payments for regular expenditures. However, you should keep a tab on these payments to ensure that you aren’t paying for purchases that you’re no longer using.
Automating the Accounting Process
Managing your accounts manually leaves your business prone to several human errors. No matter how good your accountant is, you can always improve the process by using accounting software. Modern accounting software is designed to suit various requirements, so you can rest assured that you find the ideal fit for your company. Here’s an overview of three of the best software available:
Zoho Books
Zoho Books offers a highly intuitive accounting system that includes account payable and receivable functions. Its automated procedures help businesses save a lot of time when dealing with recurring transactions.
It’s also customer-friendly and allows you to send payment reminders for each client. An incredibly versatile software, Zoho Books is available on Android, Windows, and iOS.
Patriot
Patriot offers many helpful features to simplify the accounting process. Its cash-to-accrual toggle switch saves your business precious time as it allows clients to enter their transactions as they understand them. Patriot’s team then translates this into the accounting format required for your firm.
FinancePal
FinancePal has been designed to keep small business owners in mind. It assigns you a dedicated team of United States-based financial experts who work closely with you to ensure your success. It handles all aspects of your finance, from making payments to paying your taxes.
Update Cash Forecasts Regularly
Try to maintain weekly cash forecasts for at least a few months ahead. This allows you to understand where your firm stands and plan for upcoming accounts payable.
This forecast should be updated each week based on the transactions of the previous week. Through this, you can keep track of all accounts payables and accounts receivables, better preparing you for cash shortages in the future.
Improve Communication With Your Suppliers
It’s entirely possible that your ability to make accounts payable might be restricted due to unforeseen circumstances. If this is the case, it’s best to let your vendors know and negotiate a payment schedule with them. Additionally, prioritize payments to suppliers who are essential to your revenue generation process.
Better communication with your vendors allows you to negotiate terms and discounts for the products or services that you regularly purchase.
Maintain a Record of Invoice Disputes
Invoicing discrepancies can cause problems for your company’s cash flow. It’s imperative that you keep track of any such inconsistencies to ensure your business’s solvency. This also helps you supervise all vendor transactions.
What Should You Do Next?
Having an up-to-date and holistic idea of your company’s financials is crucial to building a successful e-commerce brand. The best way to deal with the stress of calculating your accounts payable is to streamline the accounting process by using accounting software. If you’re yet undecided about which is the best accounting software, you should read our in-depth article that explains the pros and cons of the most popular accounting software of 2023.