Archive for the ‘Good Accounting Practices’ Category
Understanding Accounts Payable – The Benefit of Early Payment for Small Businesses
Most businesses continually play the game of ‘pass the cash’ with a strange juggling act taking place. Money is owed to you as a business and no doubt you owe money to others and it is likely that your creditors also owe money in their turn and so it goes on with everyone owing some and chasing the debts of others. This, in short, is how the business world works. Most of the time you probably don’t even consider it very deeply. A bill comes in and if the money is available you pay it, but learning to understand business creditors is a little more important than dealing with your bills at home.
Creditors all work in different ways and examining their terms is as vital as setting your own carefully when extending credit to your customers. Although creditors such as utility companies will employ very standard terms, where a monthly bill is followed by expected payment, vendors will vary considerably in the terms they offer.
Getting a handle on the area of ‘accounts payable’ is something that you may want to have a chat with your accountant for, but whether you choose to pump a professional for advice or look into it on your own, it is an area that you do need to understand to run your business smoothly.
You may be presented with terms such as ‘within 30 days’, which is pretty self explanatory, more confusing however could be ‘net 30’ or ‘2/10 net 30’. You would probably have a stab at guessing that ‘net 30’ means the same as ‘within 30 days’ and you’d be right, but ‘2/10 net 30’ seems more cryptic. The numbers may vary, but the meaning of the format stays the same; breaking these terms down, the 2/10 part refers to a discount for early payment, put simply, the first number, in this case 2 is the percentage discount you are being offered if you can pay within the second number (here 10); the ‘net 30’ is as before, so that the terms are ‘pay within 30 days, however if you pay within 10 days you will receive a 2% discount’.
In large businesses that run a separate accounts department, it is rarely a single individual who is responsible for paying bills; this is often, quite rightly, the recommendation of the business’ accountant who will suggest that to prevent fraud and/or theft more than one person should be involved, with different stages of the payment process falling to different members of staff; this will inevitably slow the whole bill paying process down considerably and so make it unlikely that they would be able to take-up discount offers for early payment, also with more than one individual involved such discount offers can get lost in the mix. With a small business however, where it is often the business owner themselves who pays the bills, taking advantage of such savings can make a huge difference over the course of a year.
Becoming familiar with the sort of terms offered will not only allow you to take advantage of valuable savings, but it will help you know what terms you can be expected to offer your customers in return.
