4. AP & AR

Bookkeeping

Jun 12

Welcome back to The Accounting Edit podcast.
My name is Leah McCool from Orca Accounting.
And I'm Aminder Mann from Sequoia CPA.
And today we're digging into the accounts payable and accounts receivable piece of our mini series.
So we're gonna start off with accounts payable.
What this really is, is tracking the money that the business owes to the vendors, contractors, anyone you really owe money to.
So we'll continue our example using Michelle, our photographer, from our previous series.
And we'll try to include practical examples that you can relate to in terms of Michelle.
So in this case, we're looking at any of those payments she's sending out from her business.
Yeah.
So with Michelle, she's a photographer.
We mentioned her in our last episode, just she's going to be a running example of a business owner going forward from here.
And so she's making around $250,000 a year.
And she offers a variety of different photography services.
There's weddings, in-studio sort of shoots, corporate shoots, that sort of thing.
And so for her, the money that she's sending out, which is also called payables, this can be in the form of a multitude of different expenses that she has as a business owner.
So a common type might be rent for her studio that she rents, that she does her photo shoots in, the utilities that go with that rent and that place that she's renting.
So any sort of internet, water, electric.
Then if she has subcontractors, so maybe she does videography for weddings and she hires a subcontractor to edit those videos, that's an example.
Then also just any sort of software subscriptions that she has, any inventory or supplies that she has.
So if she creates products for her own business and then she sells them, that's another sort of payable that she does have to buy on the front end so that she can sell it later.
And then any sort of marketing services, that's another type of expense that she might have to her business that she has to keep track of how much she owes and is a really good way just time over time to be able to visualize in her books so that she knows what her business owes and the expenses that she has coming up.
And just trying to understand her process here, how would you really go about processing accounts payable?
We kind of want to walk through the steps here.
First, what really kicks off this process is somebody performs a service for you or provides some sort of goods, and the vendor will send an invoice.
So that's really the start of the whole process.
At this point, you want to actually also ask for their W9 to ensure that you are collecting all this information upfront so that when it comes time for your 1099 filing at the end of the year, you don't have to chase this document.
So it's a good practice right at the beginning when you receive the invoice to kind of follow through and get that W9.
And the next step is really to review that invoice.
So you want to look at what are the services or goods they're charging for, and does this align with what you were expecting?
Sometimes you see fraudulent invoices come through.
You want to make sure you recognize the vendor before you make any sort of payment.
So you'll review it and approve it.
If it looks good, you'll move into adding this to your software platforms.
So for me, that's QuickBooks, and Leah, for you, that's Xero.
But really, you're going to enter it as a invoice into your accounts payable module, as an invoice.
And then after that, you'll really schedule the payment and send that payment out.
And there's a number of methods to send that payment.
Leah, I use QuickBooks a lot.
What do you use for your clients?
Yeah, so when the actual invoice is there and it's being reviewed, a way that you could do it is add the bill to Xero and then pay it directly through Xero.
But another couple of ways that people actually do pay it is just manually through their bank, using their bank account.
So I personally have a bank that is able to send ACHs and wires to companies that I owe payments to.
But in Michelle's case, say she doesn't have a bank that does that or her bank, she can't send wires or that sort of thing.
A lot of companies will also have payment links that they have through their own invoicing software that you can go ahead and record.
But really, the critical bit is just making sure that you are recording that payment at the time that it is paid, so that the liability created by having an invoice that is due is reduced.
But I've seen a lot of different ways that you can do this.
At my old corporate company, we used a service called Tipalti, and really what that is, is just a huge service that you load all your invoices into and then can pay it directly through that processor.
But other ones are bill.com, and through, I know QBO, Xero and bill.com and Banks and any other software that you're using, you can schedule recurring payments so that it just takes care of it all for you.
Another point to just mention here is really on the timing of making these payments.
The tendency is to want to make the payments on these invoices right away, but you really should be reviewing the terms.
So the terms being if a vendor is charging net 30, that just means that the invoice is due within 30 days.
And so you don't want to pay it right away from a cash flow management point of view.
You want to really review, how long can I go before making this payment so that you can optimize your cash flow.
So the terms are really important to review at this point as well.
Yeah.
And some people, like you said, some people will have net 30, but then other people will have net 15, they'll want their cash sooner.
And so a great way to start being proactive with just your accounting processes is evaluating the way that using AP and really being aware of what is due and what's coming up is having that visibility into how long you can actually wait to pay something.
Because if you just have a stack of bills and you have no reference for what the terms are, you might just think, okay, I have to pay all of this and I don't have the money.
Or it's just very difficult to plan if you are just looking at it without the terms in mind.
And so having an AP process here makes that all really, really easy.
Just to kind of go over a couple issues that we commonly see, if you have duplicate invoices, if you're just doing it not in QuickBooks or Xero, and there's no record of what this invoice is and you're just paying it, it's easy to have potential duplicate payments to a certain vendor.
And so that's something always that usually softwares will flag if you have the invoice number more than once.
So that's a huge one that I see a lot.
Yeah.
And then just forgetting, I think, to add the bills into the software platform.
If you're not adding it, you're not able to track it.
You're not able to track the due dates.
You don't know if you collected the W9, if this is a reoccurring vendor.
So I think it's really important to make sure that your vendors are set up in your software platform and that you're recording the bills diligently as they're coming in.
So you can track all this information in one place.
So that's another issue that I see as well.
Yeah.
And just to touch quickly on the W9 bit, really just the last bit of what having and tracking payables in a software is really helpful for is because at the end of every year, in January, by January 31st, you have to send a 1099 form to anyone that you have paid more than $600 for in the entire year that is a service-based business.
And a couple of people that are not included in that are S-Corps, C-Corps, any sort of governmental agencies, or if you haven't paid a vendor more than $600 in a year, or if they're a product-based business, these are a couple of people that you don't have to send one to.
But if you have all the information about your payables input at the time that they are incurred, then you have that information all there by the time you actually need to send out the 1099.
So collecting that W9 form upfront so you have all that set is really helpful.
Yeah.
And that's a great call out there.
And shifting gears, accounts payable is sending payments out from your company.
The other side of this is accounts receivable.
This is getting money into your business from clients or any customers that you have.
So just like accounts payable, there is a process.
Leah, do you want to walk us through the process?
Yeah.
So AR or accounts receivable is really just how you get paid and then track how you get paid for your services, for the products that you sell, anything that you're conducting in business.
So the way, and we can kind of draw this back to Michelle.
So if Michelle, she just shot a wedding and she's sending out invoices, she, you know, summer's over, she's sending out invoices for all of the weddings that she has shot in the last month, if she bills and arrears, then this sending out those invoices is an entry that you make in your software to be able to record the invoice that is now due to you.
And so that's money that you are expecting to be paid to you.
So this is in the form of a current asset that you're expecting to collect within a year.
This process really looks like she sends out the invoice for the wedding, her client reviews it and pays it, and there's a little asterisk there on hopefully pays it on a timely manner according to her terms.
But really the process here is if there's any delay with that payment, you're following up and you're also recording that payment as received and applied when the transaction occurs.
And for those payments, there's a variety of different types of payment methods, and you can dictate how you want to get paid from your clients.
So if it's more convenient for you to use your software platform, I know QuickBooks allows you to send out those invoices and pick your terms as well.
If you want net 15, net 30 due upon receipt, you can set those terms, but it also allows the flexibility to decide how you want to receive that payment, either via credit card, ACH, a wire, but just be mindful that each of these has fee associated with it.
So QuickBooks is one place that you can do this.
bill.com also has an AR management.
Leah, what are some other ways that you've seen payment being collected?
Yeah, no, I love this topic because there really is, there's so many ways to do it.
In the beginning, someone like Michelle might not want to pay the fees that are associated with the invoices, which I see a lot.
And so either she's paid with cash or she's paid with check.
And this is something that I see a lot in the beginning, but I definitely don't advise it because it's just harder.
There's just more pieces to keep track of.
Whereas if you have something like QuickBooks or Xero, Xero also has an ability to send out invoices that have a variety of different payment methods.
So similar to you, ACH, credit card.
There's just always with that, there's a multiple different payment processors in addition to Xero and QuickBooks.
There's a couple that are through different...
Someone like Michelle might use HoneyBook, which is somewhat of a client management software, but it does have payment methods and it can collect payment on behalf of your business as well.
But a tricky bit there to just know is, there's more activity related to the transaction that occurs maybe just on the HoneyBook side in this example.
And so just making sure that you're reconciling that account with what you actually deposited in your bank is a huge piece to just be aware of.
But in terms of actually collecting the payment, places like HoneyBook, Dubsado, any other sort of platform can make it very automated and you can get your money faster.
So it's really important to pick up platform that works for you and your business need.
But also I think timeliness is really important.
You want to make sure once you provide those services that you're sending out your invoice so you can get paid in a timely manner.
So it's important to turn around and send those invoices out.
Don't wait too long.
This will affect your cash flow, right?
We will all want cash coming into the business.
So sending those invoices out means that you'll get payment.
So again, review those terms on your invoices.
So you know how quickly you'll be receiving that payment as well.
Yeah.
And a huge bit just on having it recorded accurately and completely.
The reason why this is so important, at least on the future focus side, is when you're projecting your cash flow, having visibility into what is due 30 days from, you know, within 30 days, within 60 days, within 90 days, there is a report that you can pull called an AR aging report.
And this is really just as a list of what invoices are outstanding and which ones have been paid, but they won't show up on that report if they are.
But the ones that are outstanding and say Michelle sent an invoice, and it was actually due 60 days ago.
And this is a good report to remind her, okay, I need to follow up with this person.
I need to track them down because if she's doing a lot of transactions, if this is skipped over, then it's really hard to know which transactions are due when and just be able to be proactive about it.
I think that's one of the biggest challenges with accounts receivable is just clients ignoring your invoices or you having to follow up on those overdue balances.
So having a process in place where you're diligently following up and using that report is really key.
So you know what your accounts receivable balance looks like.
But more importantly, how are you going to get that cash coming in, right?
So it's important to have all that data consolidated in one place, so you can eliminate some of those challenges.
Yeah, absolutely.
And just the final last bit for accounts receivable, this is the part where no one wants it to happen.
But say you have a client, Michelle gets a client and they never pay, and it sucks because then she doesn't get that money.
But eventually, if that is never going to be collected, then there is a journal entry that you do that is essentially writing off the bad debt.
You're indicating on your books that you never expect to collect that payment.
And so there is a journal entry there that either you need to enter, or the person that is maintaining your books needs to enter.
And so you are not showing that receivable as outstanding for three, four years down the line, but it does need to leave your books at some point.
Having all this information gives you a really good look at where you're at.
So accounts payable and accounts receivable will kind of go hand in hand because they look at the flow of cash through your business.
So hopefully this has been really helpful in trying to understand what are the areas you want to focus on in both accounts receivable, accounts payable, what are the challenges and what is your process look like.
So hopefully this little mini series has been helpful so far.
Yes, thank you all for listening.
If you have any questions, then we would love to be a resource.
But for now, thank you for listening and we will be back in two weeks with another mini episode.
See you next time.
Bye.
You've been listening to The Accounting Edit, a podcast by Aminder Mann of Sequoia CPA and Leah McCool of Orca Accounting.
We'll be posting new episodes every other week, so be sure to follow so you don't miss out.
Does your business need help on the accounting side of things?
We would love to help you.
You can find Aminder at sequoia.cpa.com or on Instagram at sequoiacpa.
You can find me, Leah, at orcaaccounting.com or on Instagram at orca-accounting.
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Welcome to Episode 4 of The Accounting Edit podcast!

In this episode of the Accounting Edit, Leah McCool and Aminder Mann delve into the intricacies of accounts payable and accounts receivable, using the example of Michelle, a photographer. They discuss the importance of tracking business expenses, processing invoices, and managing cash flow effectively. The conversation highlights practical steps for handling accounts payable, including invoice review, payment scheduling, and the significance of understanding payment terms. They also explore accounts receivable, emphasizing the need for timely invoicing and follow-ups to ensure cash flow into the business. The episode concludes with insights on managing bad debts and the interconnectedness of accounts payable and receivable in financial management.

What You’ll Take Away:

• Accounts payable involves tracking money owed to vendors and contractors.

• It's crucial to review invoices for accuracy before making payments.

• Understanding payment terms can optimize cash flow management.

• Timely invoicing is essential for maintaining cash flow.

• Using accounting software can streamline the accounts payable process.

• Collecting W9 forms upfront simplifies 1099 filing later.

• Accounts receivable is about tracking money owed to the business.

• Following up on overdue invoices is key to cash flow management.

• Bad debts should be written off to maintain accurate financial records.

• Accounts payable and receivable are interconnected in managing business finances.

We can’t wait to hear what you think!! Thanks for listening.