When running a business, you sometimes need to buy or sell products or services on credit. This is where the accounts payable and accounts receivable come into play.

This guide will help you understand how accounts payable and receivable work and what their different processes are. We’ll cover the following topics:

  • What are accounts payable and receivable?
  • How accounts payable & receivable affect your business
  • What is the accounts payable & receivable process?

Whether you’re a sole trader or owner of a small company, Countingup has several tips and tools to help you understand your finances better and manage them effectively.

What is accounts payable?

Accounts payable refers to everything you owe to creditors, including lenders, companies you bought something from, and car agencies leasing your work vehicles.

Your accounts payable counts as a liability for your business, making it essential to manage them effectively and responsibly. Doing so is not only respectful to your creditors but also helps maintain confidence in your company’s ability to repay debts.

What is accounts receivable?

Accounts receivable is everything owed to you for services or products your customers buy from you on credit. When your company extends credit to a customer or client, the sale happens when you generate the invoice. But instead of charging the money right away, you give the customer a certain amount of time to pay the invoice. 

Depending on the agreement you have in place, the credit period can range from a few days to a few months.

Accounts receivable are treated as current assets on the balance sheet. You can find out more about different types of business assets in this guide.

How accounts payable & receivable affect your business

Accounts payable and receivable play a huge role in your company’s cash flow: the money flowing in and out of your business. Late payments have become the norm in many sectors, and  36% of small businesses wait 30 to 90 days to get paid.

Managing loads of unpaid invoices can be challenging, especially if you don’t have accounting software that automates some processes. Additionally, waiting for customers to pay could leave you without enough money to pay your financial obligations like bills, rent, or debts. 

Too many liabilities can also cause cash flow problems, for example, if you owe more money than you make.

An effective accounts receivable and payable process helps you keep track of what you owe and what’s owed to you to determine your company’s financial health. Knowing these things will allow you to make informed decisions that will improve your company’s cash flow ratio (which you can read more about here).

Additionally, missing payments can result in late payment interest and damage your relationships with your customers or creditors.

Optimising your accounts payable and receivable procedures and processes is an excellent way to improve your company’s cash flow and financial health.

What is the accounts payable & receivable process?

Below you’ll find the steps you take to process accounts payable and receivable items.

Accounts receivable process

The accounts receivable process typically involves these four steps:

Step 1: Establish credit conditions

Before you sell any products or start any jobs, make sure you have everything about how and when you get paid on paper and get your client or customer to sign it. Include a clear payment policy in your quote templates and contracts, and walk your clients through it in person to make sure they understand.

Step 2: Send the invoice

Send an invoice to the customer immediately after you complete the job or sale. Your invoice should clearly state financial terms and provide instructions for making the payment. 

The Countingup business current account comes with free built-in accounting software that allows you to create and send invoices to your clients quickly and easily.

Step 3: Track the invoice

Track your invoices regularly to make sure your customers pay them on time. 

Countingup will track your invoices and send you reminders about unpaid ones so you can chase them up with your clients. The system can also send reminders to clients on your behalf.

Step 4: Receive payment

When you receive the payment, simply mark the invoice as ‘paid’ in the Countingup app. Once the payment is made, you add the amount to the cash segment in your balance sheet and remove it from your accounts receivable segment.

Accounts payable process

There are typically three key steps associated with the accounts payable process, which are as follows:

Step 1: Receive & review the invoice

After you’ve bought products or services from another business, they’ll send you an invoice to request payment. Before you move to the next step, make sure the bill includes your creditor’s name, authorisation like a signature, date and any other requirements, such as: 

  • Does the invoice reflect exactly what the company ordered?
  • Have you actually received all the goods or services billed?
  • Are the unit costs and calculations correct? 
  • Has the tax been included, and is it correct?

Step 2: Record the invoice 

Once you confirm the invoice is correct, you record it in your accounts payable log, either in paper form or in your accounting software. It’s important to know exactly what you owe, who it’s owed to, and when payment is due to help with budgeting, cash flow, and other financial management. You also need to track every due payment in your accounting software.

Step 3: Send payment 

You should process all your payments before or on the bill due date you agreed with your creditor. 

To make sure a company’s cash and assets are safe, your accounts payable process should have internal controls to:

  • Avoid paying a fraudulent invoice
  • Avoid paying an inaccurate invoice
  • Avoid paying an invoice twice
  • Ensure all vendor invoices are accounted for

As you can see, the processes for accounts receivable and payable are relatively straightforward. There’s no need to overcomplicate things. Make it even simpler for yourself by signing up for a Countingup business current account and take control of your finances.

Stay on top of your invoices with Countingup

When signing up for a Countingup business current account, you also get free built-in accounting software that helps you manage your business finances easily. 

You’ll also receive real-time updates on your transaction data, balance sheet, and cash flow. These insights give you the knowledge you need to make decisions that keep your business running like clockwork.

Find out more here.