Accounts Payable Best Practices: Managing What You Owe

Accounts payable—the bills you owe—might seem straightforward. Get a bill, pay a bill. But how you manage accounts payable affects your cash flow, vendor relationships, credit rating, and even the discounts you can capture.

Poor AP management leads to late fees, damaged vendor relationships, and cash flow chaos. Good AP management becomes a strategic advantage.

Here’s how to do it right.

What Is Accounts Payable?

Accounts payable (AP or A/P) represents money you owe to vendors for goods or services you’ve received but haven’t yet paid for. When you receive an invoice with payment terms, that becomes an account payable until you pay it.

On your balance sheet, accounts payable is a current liability—a short-term obligation you expect to pay within a year.

Common types of AP:

Supplier invoices for materials
Contractor and subcontractor bills
Utility bills
Rent and lease payments
Professional service invoices
Subscription and service fees

Why AP Management Matters

Cash Flow Control

Strategic AP timing affects your cash position:

Paying too early ties up cash unnecessarily
Paying too late damages relationships and credit
Optimal timing balances both

Vendor Relationships

How you pay affects how vendors treat you:

Consistent, on-time payment builds goodwill
Early payment may earn discounts
Late payment strains relationships and may affect service

Credit and Reputation

Your payment history matters:

Vendors share information
Credit reports track payment patterns
Future credit terms depend on past behavior

Avoiding Costly Errors

Poor AP processes lead to:

Duplicate payments
Missed early payment discounts
Late fees and interest
Paying for goods not received
Fraud vulnerability

The AP Process

Step 1: Receive and Verify

When a bill arrives:

Verify receipt: Did you actually receive these goods/services? Check accuracy: Does the amount match the purchase order or contract? Confirm terms: Are payment terms as agreed? Match to PO: Does the invoice match your purchase order (if applicable)?

Never pay without verification. This prevents paying for items not received or incorrect amounts.

Step 2: Record and Code

Enter the bill into your accounting system:

Record promptly: Don’t let bills pile up unrecorded Code correctly: Assign to proper expense account Note due date: Payment terms determine when it’s due Attach documentation: Link invoice and supporting documents

Step 3: Approve

Before payment, appropriate approval:

Authorization levels: Who can approve what amounts? Budget check: Is this expense within budget? Review backup: Is documentation complete?

Segregation of duties: The person who orders shouldn’t be the only person approving payment.

Step 4: Schedule Payment

Determine when to pay:

Consider due date: Avoid late payments Consider early discounts: Capture savings when available Consider cash flow: Time payments appropriately Batch payments: Process efficiently

Step 5: Pay

Execute payment:

Verify amount: Double-check before sending Use appropriate method: Check, ACH, credit card Record payment: Mark invoice as paid Retain confirmation: Keep payment proof

Step 6: Reconcile

Ensure accuracy:

Match payments to invoices: Nothing outstanding that’s been paid Review aging report: Know what’s owed Catch errors quickly: Investigate discrepancies

Best Practices

1. Centralize Bill Receipt

Create one place for bills to arrive:

Dedicated email address (ap@yourcompany.com)
Physical mail goes to one location
Vendor portal access managed centrally

This prevents bills from hiding in various inboxes.

2. Process Bills Promptly

Record bills within 24-48 hours of receipt:

Know what you owe in real-time
Never miss a due date by accident
Accurate cash flow forecasting

Backlog creates chaos.

3. Implement Three-Way Matching

For goods received, match:

Purchase order: What you ordered
Receiving report: What you received
Invoice: What vendor billed

Discrepancies require investigation before payment.

4. Maintain an AP Aging Report

Track all outstanding payables by age:

Vendor	Invoice	Amount	Current	1-30	31-60
Supplier A	5001	$2,500	$2,500
Vendor B	4892	$1,200		$1,200
Service Co	3344	$800			$800

Review weekly to ensure nothing becomes overdue.

5. Time Payments Strategically

Pay on the due date, not before (unless capturing a discount):

Your money earns nothing in their account
Keep it working for you as long as ethical

Take early payment discounts when advantageous:

2/10 Net 30 = 2% for paying 20 days early
Annualized, that’s a 36% return
Usually worth taking if you have the cash

Never pay late:

Late fees add up
Damages vendor relationships
Hurts your credit and reputation

6. Maintain Vendor Information

Keep accurate vendor records:

Contact information
Payment terms
Banking details (for ACH)
W-9 on file (for 1099 reporting)
Contract terms

Review and update periodically.

7. Segregate Duties

Reduce fraud risk by separating responsibilities:

Person A enters bills
Person B approves payments
Person C processes payments

For small businesses where one person does everything, owner should review bank statements and cancelled checks monthly.

8. Use Technology

AP software and automation:

Bill.com, Melio for payment processing
Dext (Receipt Bank) for bill capture
Accounting software AP modules
Automatic payment scheduling

Automation reduces errors and saves time.

Payment Methods

Checks

Pros: Familiar, provides float, widely accepted Cons: Slow, manual, risk of fraud, harder to track Best for: Vendors who don’t accept electronic payment

ACH/Bank Transfer

Pros: Fast, inexpensive, easy to track Cons: Requires bank info exchange, some setup Best for: Recurring payments, larger amounts

Credit Card

Pros: Float time, rewards, easy Cons: Fees if vendor passes through, not always accepted Best for: Smaller purchases, when you need float

Online Payment Platforms

Pros: Convenient, tracked, various payment sources Cons: May have fees, another system to manage Best for: Streamlined AP processes

Managing Cash Flow with AP

Payment Calendar

Map out upcoming payments:

What’s due each week?
What’s the total cash need?
When are major payments due?

Prevents surprises and enables planning.

Negotiating Terms

Work with vendors on terms that fit your cash flow:

Request Net 45 or Net 60 for key vendors
Negotiate based on payment history
Trade early payment for discounts

Good vendors will work with good customers.

Prioritization When Cash Is Tight

If you can’t pay everyone on time:

Always pay first:

Payroll and payroll taxes
Essential operations (utilities, rent)
Key vendors critical to operations

Can negotiate:

Vendors with strong relationships
Large companies with flexibility
Service providers

Communicate proactively: If you’ll be late, tell them before the due date, not after.

Common AP Mistakes

Duplicate Payments

Same invoice paid twice. Causes:

Multiple copies of invoice received
Check request and automatic payment
Poor tracking

Prevention: Good records, matching, and verification.

Missed Early Payment Discounts

Those 2% discounts add up. Track discount due dates separately from payment due dates.

Paying Before Verification

Paying for items not received or wrong amounts. Always verify receipt and accuracy first.

Poor Record Keeping

Can’t find invoices, don’t know what’s been paid. Maintain organized digital files.

Letting Bills Pile Up

Unprocessed bills create chaos. Process within 48 hours of receipt.

Ignoring Small Vendors

Small vendors often get paid last, but they may need the cash most and provide important services. Don’t neglect them.

AP Metrics to Track

Days Payable Outstanding (DPO)

Average days to pay bills: DPO = (Average AP / COGS) × Number of Days

Higher DPO means holding cash longer (but don’t damage relationships).

AP Turnover

How many times per year you pay off average AP: Turnover = Total Purchases / Average AP

Lower turnover means longer payment cycles.

Payment Accuracy

Percentage of payments without errors:

Correct amount
Correct vendor
On time
No duplicates

Target: 99%+

Discount Capture Rate

Percentage of available discounts taken: Discounts Taken / Discounts Available

Missing discounts is leaving money on the table.

Technology for AP Management

Bill Management Software

Bill.com: Full AP automation
Melio: Free ACH payments
BILL Spend & Expense: Corporate cards + AP

Receipt Capture

Dext: Scan bills, extract data
HubDoc: Similar functionality

Accounting Software AP Features

QuickBooks bill pay
Xero bill management
Wave invoicing

Payment Processing

ACH through your bank
Positive pay for check fraud protection
Virtual cards for one-time payments

Your AP Action Plan

This Week

Run your AP aging report
Identify anything overdue—pay or communicate
Check for upcoming early payment discounts

This Month

Review your AP process—any bottlenecks?
Set up centralized bill receipt if not in place
Verify all vendors have current W-9s

Ongoing

Process bills within 48 hours
Review AP aging weekly
Pay on time, every time
Capture early payment discounts when advantageous
Reconcile AP to vendor statements periodically

Need help organizing your bill payment process? At Profit Path Books, we help small businesses implement AP systems that optimize cash flow and prevent costly mistakes. Book a consultation to discuss your needs.