Invoice processing and following up with customers is a routine task for the accountants. Successful accounts receivable departments do it in an organized and controlled manner.
You will surely not want your business owners to look into invoices piling up and deciding on invoice factoring with outsiders. Working capital runs the business operations and invoicing cash inflows are the fuel of this engine. No business can afford to go for bank facilities due to a shortage of cash every time.
Effective invoice management can help you avoid the complexity and complications of customer relations and delayed payments.
A successful accounts department will essentially create a consistent, organized, and accurate invoice management system in place. As the businesses grow; invoice management becomes a tangling issue.
Here some effective tips that can help you organize your invoicing jumbles:
Automate The Invoicing System With Right Choice:
First thing first, choose an automated invoicing system that best suits your needs. All invoicing systems come with price and subscriptions.
This minimal upfront cost will save you tons of money in the future. It will make your life easy with automatic record-keeping, organizing, and analyses. Automation will offer you many benefits that come handy such as reminders, repeat invoicing, customization, etc.
Create a Customer Database:
In a growing business with a diversified set of customers, it will be a tedious task. Once you adapt to an online invoicing system, creating a customer database becomes easier.
This can help your business keep good relations with important customers, decide pricing strategies, and provide customized services. Prioritizing and follow up for invoicing also becomes easier with a customer database.
Follow Schedules And Avoid Procrastination:
Make invoicing schedules and set up a frequency that you can follow up. You’ll surely not want to be chasing up with customers all the time.
Once you make a proper schedule of invoicing, follow it rigorously, and avoid procrastination. Missed schedules and delayed invoicing will make things messy for your accounts department.
Offer Invoice Discounts:
It’s an inevitable phenomenon that all businesses face; you end up with invoice chasing and a bulk of them too.
Offer your customers discounts on invoicing for clearing up the balances. It sounds odd but it can help you reduce your pile of pending invoices quickly. Creating new invoices and record-keeping isn’t a monumental task, receiving payments against raised invoices is.
Charge Penalties for Delayed Invoice Payments:
Keeping good business relations with customers is a delicate job. Sometimes discounts and offers do not work with customers.
If your customers know they’ll be paying extra for delayed payment, they will likely avoid it in the first place. Make penalties for delayed payments part of your contract with customers.
Follow Business Terms:
Often business face the situation of conflict with customers and their invoice get stuck, sometimes never get paid.
To avoid such a smeared and awkward situation, always stick with your business terms. The process will be more effective when you follow the same business terms and procedures with invoice creation. This will create consistency and pave a way for clear communication with customers.
Use Consistent Invoice Codes And Ids:
This should be a straight forward task for large businesses using online or cloud-based automated invoicing systems. Small businesses should make sure to organize invoicing properly way with consistent invoice coding and customers IDs.
An ideal invoice should also include standard information including updated name, contact, product or service, and due date.
Effective invoice organizing starts with a good plan and accurate record keeping. Consistent and accurate invoice management can help shape a well-organized invoicing system. Effective and organized invoice management forms the basis of a successful account receivable system that can smoothly run the business operations.
Every business tries to keep the working capital in good shape. One traditional approach to achieve that goal is to delay the accounts payables as long as possible.
That tactic can create extra cash for the short-term but the long-term effects can be devastating for the business. Good supplier relations can improve your company inventory management, production, and ultimately sales.
Calculating and forecasting customer invoices is relatively easy, it gets complicated to know what and when a business owes to the suppliers. A clear and precise forecast for this important cash outflow can help management with working capital, cash flow, revenue, and profit forecasts.
A good accounts payable department can adapt a few habits and methods to effectively streamline the payables process. Accounts payable strategy would differ on a case to case basis depending on company business size and industry.
Here are some useful strategies that all account payable departments can follow for effective management:
Automate the Accounts Payable Section:
It’s highly likely that your business is already using digitized and automated accounting department services. The accounts payable department often takes the backseat as the accounts department often follows a traditional approach when it comes to supplier relations management.
Automation of supplier invoices will form the basis of a good accounts payable management system. Account payable department can stay ahead of the schedule proactively rather than just chasing notices all the time.
Adapt to a centralized Approach:
If your business is large enough, operating with branches and service centers, your accounts payables need to be centralized. Centralization of all accounts payables in one place will provide manifold benefits.
Some key benefits of a centralized approach will include increased supplier data, increased control over payment terms, and increased price negotiation power.
The approach will add benefits of efficiency and lower costs by following the standard procedures and practices.
Define Roles And Delegate Powers:
In large firms, the accounts payable departments always needs prior approvals and follow instructions from top-level management.
If the top management can define the accounts payable staff roles more clearly and delegate powers it can speed the whole process. It’s important to delegate powers with additional power and controls.
Streamlining the workflow can ease all business operations. It will eliminate inefficiencies and reduce lead times. If it’s not possible to delegate powers to lower management a clear and precise flow of work can help with effective payables management.
Create Supplier Database:
Create a supplier database electronically, linking both accounts payable department and suppliers. This portfolio of suppliers can provide valuable information to both suppliers and payable departments such as payment schedules.
It will increase supplier reliability as they can track their payment schedules, amounts, and any changes requested electronically.
Apart from setting up procedural methods and newer technology, a successful accounts payable department should create a good culture. Effective management techniques should then become the norms and characteristics of a successful team.
A good team managing effective accounts payable department should create some habits:
- Shun the notorious habits of procrastination, become more flexible. and proactive by reducing wait times for the suppliers.
- Deal with one task at a time when faced with multiple tangling issues from suppliers.
- Make full use of technology; automation and software are to help you streamline your workflow.
- Accounting software and automation help you assign clear roles and delegate powers to the right person; make the best use of it.
- Make supplier relations your priority, it will benefit the whole organization and increase your stocks.
- Once you take up a delayed payment or deferred payment issue, do it from start-to-finish.
Effective accounts payable management is not just about the automation of manual processes. Creating a quality culture prioritizing the organizational goals and managing supplier relations reaps rewards of long-term success.
Streamlining the payables accounts through innovative technology and efficient management will increase the overall organizational efficiency.
There are many different forms or types of businesses. The simplest type of business is a sole proprietorship. It is a business that is owned by a single owner. Sole proprietorships are generally smaller in size and depend on a single owner to provide all the capital for their operations. Once these businesses grow, the owner may bring in other partners to join the business.
Businesses with more than one owner are known as partnerships. These are businesses that are formed by at least two owners. The jurisdiction in which a partnership operates will also define the maximum number of partners for a partnership.
In a partnership, the owners, or partners, share the profits and losses of the business. The percentage of their share of the profits or losses is predetermined. This is, generally, defined before the creation of the partnerships in the partnership contract or deed. Partnerships are bigger businesses as compared to sole proprietorships.
The problem with the above two types of businesses is that they are not limited liability business. This means that in case these businesses wind up, their owners will be fully liable to pay the obligations of the business. However, in some types of partnerships, the liabilities of one or all of the partners may be limited.
The final type of business is known as corporations. Corporations are legal business entities that can have anywhere between 1 to unlimited owners. The ownership of corporations comes in the form of shares. Shares are legal documents that give the ownership of a corporation to the shareholder.
The percentage of ownership depends on the number of shares that the shareholder possesses. The earnings that corporations pay to their shareholders are also dependent on the number of their shareholding.
Businesses can change from one type to another. However, these changes may be subject to some rules and regulations. For example, the owner of a sole proprietorship can easily convert it into a partnership or a corporation. However, it may be easier for businesses to upgrade rather than downgrade due to the different rules and regulations.
There are many advantages and disadvantages of corporations as a general or as compared to other types of businesses. Some of these advantages and disadvantages are as discussed below.
Advantages of Corporations
There are many advantages of corporations, as a type of business, for both the shareholders and the corporation itself. Some of these advantages are listed below.
1) Limited Liability
As discussed above, corporations create limited liability for the shareholders. It means that in case a corporation gets liquidated, the shareholders will not be fully liable for the debts of the corporation.
Its shareholders will only be liable for the debts of the corporation limited to the value of their shareholding or their capital invested in the corporation. Limited liability businesses are more lucrative to investors as investing in corporations ensures they don’t have to pay for any liabilities above their capital.
This is different from other types of businesses such as sole proprietorships or some types of partnerships. In case these businesses wind up, the owners are held liable for all the liabilities of the business.
This means that the owners of an unlimited liability business will have to pay the liabilities of the business from their personal assets.
2) Separate Entity
Corporations are also considered a separate entity from their shareholders. This is one of the main reasons why corporations are a limited liability. However, that isn’t the only benefit of being a separate entity.
Corporations can enter into contracts and guarantees, lend and borrow money, invest funds, buy, own or sell property, and get into legal disputes as a separate entity. This means that a corporation does not need its owners for these things.
3) Transfer of ownership
An advantage of corporations for their shareholders is that corporations allow their shareholders to transfer their ownership without restrictions. Shareholders can easily buy and sell the shares of a corporation in a stock market without the need for prior approval.
In partnerships, all the partners must agree to admit a new partner. If any existing partner does not approve of a new partner, then the new partner cannot join the partnership.
Similarly, it can also be advantageous for the corporation. When shareholders buy or sell their shares, the operations of corporations are not affected by these transfers. On the contrary, for partnerships, if a new partner joins, or an existing partner leaves, the existing partnership deed becomes invalid.
A new partnership deed made every time there is a change in the dynamics of the partnership. Furthermore, corporations exist even after a shareholder leaves, joins, or even dies, which may not be possible for other types of businesses.
4) Management expertise
In most cases, the shareholders of corporations will be different from their managements. This can be advantageous for both the shareholders and the corporations. For shareholders, it means that they do not need to have any technical skill or knowledge to become owners of a business.
This is different from partnerships where the partners are involved in the management of the partnership. While some partnerships may have partners that do not manage the partnership, most of the partners are still involved in management roles.
For corporations, it means that they do not have to be affected by shareholders leaving or buying shares. Similarly, it means that the corporations can hire professionals for every management role to ensure the operations of the corporation run as smoothly as possible.
This can also be useful for shareholders as expert management means the corporation generates the maximum possible wealth for its shareholders.
5) Unlimited potential
Theoretically, corporations also have unlimited growth potential. This is mainly because corporations are not dependent on a single owner or a few owners for capital requirements. As discussed before, a corporation can have an unlimited number of shareholders.
Similarly, even if the existing shareholders cannot provide capital to a corporation, it can issue shares to new shareholders to generate finance. Other types of businesses such as sole proprietorships and partnerships are dependent on the capital that the existing owners invest in them.
6) Easy to invest in
Corporations are also easier to invest in as compared to sole proprietorships and partnerships. For a sole proprietorship, the single owner of the business needs to bear all the capital requirements of its operations which makes it an expensive and risky form of investment.
For partnerships, the existing partners may not allow new partners to enter, thus, making investing difficult in partnerships. For new partnerships, it may still be difficult to find agreeable partners that share the same objectives and goals. For corporations, anyone can buy shares from the market.
Disadvantages of Corporations
Corporations can also be disadvantageous as a form of business. These disadvantages may apply to both the shareholders and the corporations. Some of the disadvantages are as discussed below.
1) Agency problem
One of the problems of corporations is that their management is separate from their shareholders. While this can provide advantages for both the corporation and the shareholders, as discussed above, it can also be problematic.
The management of a corporation acts as agents of the shareholders in the corporation. Agency problems arise when the objectives of the management do not align with those of the shareholders.
Since the shareholders of the company cannot continuously monitor the operations of corporations, it may promote fraudulent activities by the management. While this problem has existed for all corporations for a long time, there is no definite solution to it.
Corporations may be required by law to perform audits and comply with certain rules and regulations. However, these solutions still do not guarantee that agency problems within corporations will not exist.
2) Difficult to form
Corporations are more difficult to form as compared to other types of businesses. This is because corporations must comply with stricter rules as compared to other types of businesses. Similarly, there are several different stages that the initial owners of a corporation must go through to form a corporation.
These stages may require a lot of legal formalities to be performed. Furthermore, after forming a corporation, promoting it can be difficult and time-consuming. Overall, corporations are more difficult to establish and can result in more costs for the initial owners.
3) More compliance
As discussed above, due to various reasons, corporations are subject to stricter compliance standards as compared to other businesses. These compliances ensure the safety of shareholders’ investments in corporations and can also be beneficial for the corporation.
However, this may also create more administrative burdens and costs for corporations. Similarly, in case of any non-compliance, the corporations may face penalties or legal actions.
4) Double taxation
As discussed above, corporations are separate entities which may be advantageous for various reasons. However, this also means that a corporation, as a separate entity, will have to pay its taxes. Once a corporation is taxed, it can distribute any earnings to its shareholders in the form of dividends.
These dividends are then taxed again for each shareholder. This means earnings made by shareholders through corporations are subject to double taxation.
Corporations are one of the advanced forms of businesses. These are different from smaller types of businesses such as sole proprietorships and partnerships in many ways. There are many advantages and disadvantages of corporations as a type of business.
The advantages are that they are limited liability businesses, they are considered a separate entity, and their ownership is easily transferrable. Furthermore, they can benefit from management expertise, they have unlimited potential to grow and they are easy to invest in.
Their disadvantages are that they may give rise to agency problems, they are difficult to form, they are subject to stricter rules and regulations, and shareholders are subject to double taxation.
Accounts Payable Management tends to have a significant amount of importance for companies, primarily because of the reason that they tend to influence the overall liquidity cycle of the company. If not managed in an optimal manner, it might result in companies facing significantly higher purchase costs.
Therefore, it is quite important to ensure that those companies pay significant attention to the management of these payables so that they are able to extrapolate the best possible spread between the time when they receive the money and the time when they have to settle their debts.
A lot of strategy and thinking goes into typical accounts payable management. The main criteria in this regard are to ensure that companies are able to manage their accounts, and ensure that they avoid any undesirable circumstances in the form of increased costs, or strained relations from the company in this regard. Given below are some tips and tricks that can be used in order to manage accounts payable for organizations.
Tips and Tricks to Manage Accounts Payable
- Simplification of the Accounts Payable Process: This tends to be one of the main precursors of accounts payable management. As a matter of fact, it is highly important to ensure that the process is as simplified as it can be, in order to eradicate any confusion. This can be done by reducing the number of check runs in a month, and establishing payment cycles over a period of time so that there is clarity regarding settling of debts over the course of time. In the same manner, SOPs before payment disbursement are also effective, because they ensure that organizational heads do not have to spend time verifying their transactions.
- IT Integration: IT integration is perhaps the best tool that can be utilized in order to get the maximum advantages from the Accounts Payable Cycle. Using technology can enable companies to ensure that they have a proper idea regarding the integrations that need to be carried out so that they can ensure that they do not miss out on payment discounts, or payment cycles. Transaction flow and arithmetical errors can also be highly damaging to the cause. Therefore, it is in the best interest of these companies to ensure that technology integration is in place so that the chance for human error is minimized.
- Internal Controls to reduce Fraud: Segregation of duties and a clear cut protocol to be followed in terms of cash disbursement is a preventive measure that can be utilized by the companies in order to ensure that they are able to reduce fraudulent activities within the company to a maximum. Prevention of dummy vendors by dishonest employees can only be curtailed if companies have a stringent structure to follow in terms of verifications within the company.
- Negotiation of Vendor Terms: Inventory holding and ordering costs can be detrimental to the finances of the company, if not managed properly. Therefore, in order to set up an Economic Order Quantity for the company to follow, it is imperative that companies are able to set up an agreement with their suppliers regarding the terms that are going to be offered to them. By establishing loyalty with these parties, companies can easily ensure that they are able to get the best contracts for themselves, and they do not have to spend time looking for other vendors. The lesser the vendors they need to manage, the easier the management of these payables.
- Role of the CFO: It can also be seen that the role of the CFO should be limited to the signing of authorities, and other relevant documents so that he does not get overwhelmed by the need to check every payment made from the company’s account. This can be done by establishing other secondary signatories, and verification channels, so that the entire burden does not fall on one person.
Therefore, it can be seen that accounts payable management tends to be an increasingly important component for companies. As a matter of fact, it can be seen that this particular management can easily help companies to manage their resources in a much effective manner.
Proper management considerably adds to the credibility of the company and helps them establish their integrity in the market. This also opens avenues to get more discounts, and more credit periods for the company, because of the fact that the suppliers know about the intent of the company to settle their debts on time.
Liabilities can be defined as the amount that is owed by a company in exchange for goods and services that the company has utilized or plans on utilizing over the course of time. This is the amount that needs to be paid by the company, and therefore, should include a number of different things.
Liabilities can broadly be categorized into Financial and Non-Financial Liabilities. Whereas Financial Liabilities can be regarded as liabilities that are incurred as a result of normal discourse of the business, where liabilities are mainly subdued in cash, non-financial liabilities are the opposite.
On the other hand, non-financial liabilities are mainly contingencies or types of liabilities that are not of financial transaction origin. Examples for these liabilities include deferred revenue, advances received and provisions that might have to be made as a result of these changes.
Non-Financial Liabilities mainly require non-cash obligations that need to be provided in order to settle the balance, which includes goods, services, warranties, environmental liabilities or any customer liability accounts that might otherwise exist.
In other words, non-financial liability can best be described
as an obligation that is associated with the retirement or maintenance of a
long-lived asset in the future. Therefore, it might be contingent on certain
outcomes, based on which the company would then have to complete the required
Measurement and Accounting Treatment
According to IAS 37, Non-Financial Liabilities should be measured at amounts that would rationally be paid to settle any present obligation or amount to transfer it to a third party on the balance sheet date.
An entity is supposed to recognize a non-financial liability when the definition of a liability has been satisfied, and the non-financial liability can be measured reliably.
The basis of estimating non-financial liabilities relied on the expected cash approach. In this regard, multiple cash flow scenarios are used which reflect the range of all the possible outcomes, coupled with their respective probabilities.
This is primarily because of the reason that the expected cash flow approach is an approach that makes an appropriate basis for measuring liabilities and classes of similar obligations for single corresponding obligations.
Additionally, it can also be seen that Non-Financial Liabilities can be measured before tax. In the same manner, an entity is also supposed to include all the relevant risks and uncertainties. Similarly, the non-financial liability should be canceled when the obligation is settled, or canceled.
In the case where the Non-Financial Liability cannot be measured properly, it shall make complete disclosure about certain disclosures so that relevant information can be communicated to other people.
To conclude, it can be seen that Non-Financial Liabilities can be regarded as contingent liabilities which may or may not occur. The overall assessment of this particular task is based on the risk and return rationale, relating to the possible outcomes which might occur as a result of the fulfillment of this obligation.
Calculation and recording this particular liability is an important aspect, and because of the importance of this possibility, it should be duly communicated to the shareholder in the year-end financial statements.
Accrued Liabilities can be defined as an obligation that a corporation has assumed in the case of the absence of a confirming document.
This is an internally created memorandum which is prepared in the case where the corporation is yet to receive a confirmation, like an invoice, from the supplier or the biller, but they have already consumed the goods or services. Subsequently, in this case, the accountants are supposed to record it as an accrued liability.
As mentioned earlier, it can be seen that Accrued Liability is regarded as an expense that needs to be paid for by the company but has not been billed for.
According to the matching principle, and the principle of relevance, it only makes sense to record the current year’s expenses in the current year’s financial records. There are a number of examples of such transactions, some of which are mentioned below:
- During a normal course of the business, there are wages and salaries that are incurred over a certain time frame. As a matter of fact, it can be seen that these wages and salaries need to be paid for, but there is not a proper invoice regarding the hours they have been billed. Therefore, this is going to be treated as an Accrued Liability.
- In the same manner, taxes and interest rate payments carried forward from one year to another are also treated as a Current Liability.
Speaking of the treatment of an accrued liability, it is calculated on the basis of the quantity information in the receiving log, as well as the pricing information mentioned on the authorized purchase order.
The main rationale behind this particular entry is to ensure that the expense of obligation is duly recorded in the period where it is initially incurred.
As far as accrued liabilities are concerned, they are expenses that have already been incurred and need to be paid for. Therefore, under the matching principle, they are supposed to be treated as current liabilities to denote that these are liabilities that need to be paid in the current time period.
Hence, it can be seen that accrued liabilities are placed in the Balance Sheet (or Statement of Financial Position) of the company, in the Current Liabilities section, unless they have been paid for. After payment, they are then eliminated from the Balance Sheet. The reason behind their classification is primarily on the grounds of the debts that need to be honored within a cycle of 12 months.
To conclude the points mentioned above, it can be seen that accrued liabilities are also referred to as accrued expenses. Examples include accrued salaries, wages, interest and tax payments and so forth. Therefore, these expenses are mainly clubbed in order to simplify the presentation process.
Regardless of the fact that they should be treated as Accrued Liability, yet it can be seen that they are reported as Current Liability because of their very nature.
In the same manner, it can further be noted that these liabilities are short term, and need to be settled at a time interval of a few months, because of the fact that they are expenses that are incurred in the day to day running of the business.