POV: You’re seventeen, at the mall with your friends. You see a new pair of kicks you absolutely must have and decide to run dad’s emergency credit card to purchase them.
“I swear I’ll pay you back as soon as I have the money!” you assure him when he asks if, in fact, the new Nikes were an emergency.
At seventeen, life lessons from your parents tend to come with some wiggle room. But a verbal promise to pay your bills doesn’t go nearly as far when you’re an adult small business owner.
Staying on top of your finances and keeping a keen eye on what bills you need to pay (and when) is essential for longevity and health within your business. That’s why you need to understand what an accounts payable aging report is, and how to use it.
What is an Accounts Payable Aging Report?
An accounts payable aging report, or an AP aging report, gives you a summary of your accounts payable for supplies, inventory, and services—anything you’ve bought for the running of your business that hasn’t been paid for yet.
Simply put? An AP aging report tells you the money you owe, and when.
With a quick glance at your report, you’ll know which creditors you owe money to, how much money you owe, and the length of time you’ve owed each vendor. This acts as an easy-to-read visual for staying on top of your payments.
Let’s say you hire an accountant (*wink wink*) to manage your finances. Your accountant will send you an invoice, and that invoice will be entered into your accounts payable. Once you pay that invoice, it will disappear. Pretty simple.
Pro tip: Your AP aging report will only show unpaid invoices.
How to read your AP Aging Report
Your AP aging report categorizes your debts/payables by the amount of time that’s passed since the invoice was received. In other words, it gives you a clear understanding of which payments are most pressing.
Generally, categories will look a little something like this:
- List of vendors/suppliers
- Debt owed
- Current invoices (0-30 days)
- Debts 31-60 days past due
- Debts 61-90 days past due, etc.
Similar to an accounts receivable aging report, it lists items according to the number of days they’re past due.
Note that these reports don’t usually include vendor’s specific terms, because they assume payments are due within 30 days. Make sure to avoid late payments by understanding each vendor’s individual credit terms.
How to manage your AP aging report
- Figure out your setup
How do you like to budget? You have a little freedom here to determine what time of the month is most convenient for you to pay certain debts.
If most of your bills are paid on the 1st of every month, maybe you decide that the 14th of every month is when you pay certain vendors.
- Use your purchase orders
One of the best ways to stay organized in a growing business is to have department or project managers complete purchase orders for every new purchase.
The larger your business gets, the more difficult it may be to stay on top of these invoices. When an invoice is received it will be attached to its purchase order, entered into your AP aging report and…voilà! You have a system that works.
- Immediately enter invoices
Not tomorrow, not next week. Now. Procrastination has never been your friend, but it definitely isn’t when it comes to your accounts payable. No one wants a late fee!
One of the most common mistakes small businesses make is that they receive an invoice for a service or purchase, but do not immediately enter it into their accounts payable.
Stay on top of your payments by keeping them organized within your AP aging report.
- Decide when you’ll pay up
It’s all about balance. (And we’re talking finances here, not diet. But do you need those fries?)
Balancing your accounts receivable with your accounts payable is an art. If you can figure out how to align a predictable influx of income with when you pay certain vendors, you’ll always have enough money in the account.
That said, the better the relationship with your vendors, the more flexibility you may have in negotiating longer payment times.
- Reconcile your reports
At the end of every period, make sure your AP aging report outstanding balance matches what is on the general ledger.
What does this mean? It means that at the end of the period, all invoices should be accounted for, and your balance due should match your balance sheets across the board.
Your accountant, as well as your bank, will most definitely be on top of this. But it starts with you!
Avoid Late Fees & Illuminate Cash Flow Problems
The primary reason you need an accounts payable aging report is so that you can maintain a solid relationship with your vendors and have adequate liquid cash to pay up when you need to.
Reputation counts for a lot. Being on time with your payments establishes a solid relationship with the people you’re working with. If you’re noticing that you’re consistently late on your payments, it’s probably a sign there is a cash flow problem that needs to be analyzed.
Need an easy way to properly track your debts and accounts payable? Contact KYN to schedule a consultation today. We specialize in keeping your books organized.
Got further questions about the accounts payable aging report? Let us know below.