Every business uses their own system and some are actually good than others. For instance, they use the cash basis accounting practices instead of the more useful and robust accrual method. If this is used, it can wreak havoc on your accounts payable reports, especially when your company grows at a steady pace that ensures annual revenue in the millions.
If you are still using arcane accounting practices at this point, you may want to contact some accounting services in Malaysia to help you with such things.
Anyway, in today’s article, I will talk some great ways to help improve your accounts payable department’s efficiency.
What is Cash Basis and Accrual Accounting?
For you to better understand what I am about to say, I will first talk about cash basis and accrual accounting.
Cash basis is an old system of accounting that is mainly used by small business owners and sole proprietors.
In this method, the company’s revenue is reported whenever it receives cash revenues and the expenses are reported whenever the company makes use of cash to buy something- i.e. to buy merchandise or equipment to be used by the business.
In Accrual Accounting, the revenue is still reported whenever the company receives cash, but it records expenses differently in that they are reported whenever they occur (which makes sense from a business perspective).
Even though the difference in their methods are small, they actually have a huge impact. Why does accrual accounting matter more than the cash basis accounting?
For example, your accounts payable is often late and is recorded only whenever the entry is available. Because of the frequent lateness, you tend to make this entry slide for about three months.
The problem is that if you let this happen, you will invariably pay three times the usual size of the entry, all in one month.
If you are still using cash basis accounting, you should be tracking and recording your company’s expenses in that same month as well. The expenses for the two months before that will seem quite small, that your expenses in the third month will look like it was artificially inflated.
As you can tell by now, it makes a huge difference. Even if you pay out all of your bills on time, it can make a huge difference in your accounts payable financial records when you file for your quarterly taxes.
How to Make Your Accounts Payable Department More Efficient?
Because of the major limitations of cash basis accounting, your accounts payable department should immediately shift to accrual accounting. When you are logging your company’s expenses this way, it can really help make things easier.
- Perform Job Costing Functions
Because accrual accounting is a more effective method, shifting to it means that you can accurately perform job costing functions immediately.
- Perform Financial Forecasting
If you know how much money is flowing in and out of your business and you are logging it in a way that tells you exactly how much assets you currently have on hand, you can predict your company’s financials in the foreseeable future.
- Getting Accounting Services
If your accounts payable department is bombarded with all of the key information and they are unable to log it properly, then getting some outsourced accounting services will give you the extra push that your company needs.