How to manage paying invoices or bills

Keeping on top of your expenses is key to running a healthy business. Over-extended businesses leave themselves open to real financial headaches, and when a business continually pays late, the relationships with those creditors can suffer or even disappear. Establishing tight practices around paying as much as receiving payments gives the business much more clarity on its position at any given time.

So, how does a business best approach bill payments? Read on to find out.

Build bill payments into the budget and forecast - with a buffer

This one may sound fundamental, but it’s really important. Without the upcoming costs each month being estimated properly, the business may get caught short. Financial planning and forecasting needs to capture all of the likely and confirmed costs so the profit and loss is a reliable reference point.

Bill payments may fluctuate, but for longer-term forecasting, it’s sensible to capture the costs at their higher end. If the eventual bills with that supplier are less, there will be a surplus, which is much better than a shortfall because not enough is put aside. As another means to protect the business’ ability to pay its bills, we’d recommend creating a buffer amount to pay for incidental bills or new suppliers that may be associated with growth. How much this is will depend entirely on your business, the types of suppliers it needs and your aspirations for growth. It’s one of the good things about having a RightWay Business Partner - they can help model this out for you.

Having a buffer in place for bill payments gives the business more freedom to evolve and adjust its engagement with suppliers. Even if the forecasted spend fluctuates across the year (for example, a business that makes different sized orders from a wholesaler across the year), there may be situations where the business wants to increase how much it spends with a supplier. Having some contingency or ‘fat’ built into the forecast assists bill payments that accommodate this.

But there’s another reason why a buffer is important - unforeseen costs can come up that require budget to be found from somewhere. All businesses should expect the unexpected at some point. Having an amount put aside for such eventualities (sometimes referred to as a ‘War Chest’), as well as headroom in each supplier budget gives the business some options for taking care of these situations, without impacting another supplier relationship.


Keep a separate account for bill payments

Bank account structure can be a really easy way of seeing the split of your business’ funds, with each account having a clear job. A common example of this is having separate tax and GST accounts, but it can extend to an account that contains all the bill payment funds put aside, ready for paying them by the due date.

Businesses will often keep the payroll account separate as well as this is just as, if not more important than the suppliers to protect.

Having a structured account layout allows other accounts to show a more accurate reflection of the cash position of the business. You may wish from here to have an everyday account, and a savings account that is built up.

When everything is muddled in your business bank accounts, it’s trickier to know what shape the business is in. Split it up logically and enjoy more clarity. Accounting programmes like Xero also can feed all of these accounts in, so you can use them to pull useful reports.

Capture each bill in your accounting platform as soon as you get it

Speaking of Xero, accounting platforms are highly recommended to keep tabs on what is outstanding and when it’s due. Accounting tools take the manual entry of spreadsheets, emails and (gasp!) post-it notes and bring all of your suppliers and bills into one place.

The main dashboard screens on these systems provide an excellent snapshot of the business' current financial situation - current to that day.

As bills are paid, you can reconcile these transactions against your bank feed, keeping everything up to date. Xero has a view of ‘bills you need to pay' where the summary of these are kept with due dates tracked. The status of each can move through an approval stage if the person in your business who manages the accounts is separate from the party signing the payment of bills off (e.g the business owner or other designated role).

Make it one person’s accountability for getting invoices paid

While there may be a sign-off process, it’s actually a good idea in a small-medium business to have one person who ultimately processes the payment to suppliers each month - or an ‘accounts payable’ role. They will work in the accounting platform and your other systems to focus solely on getting the business’ payments processed on time. If this job gets split amongst multiple people without a very clear division of labour, things can fall through the cracks. By making one person accountable for this task, there isn’t the chance of ‘I thought you had sorted it’.

To reiterate, the person processing payments may not ultimately approve particular bills (such as those over a certain dollar amount or from certain suppliers), but they will take care of the final step.


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Determine what your process is if a bill can’t be paid by the due date

Whilst standard operating procedure is to have enough to cover all costs in the month, the simple fact is that things do happen. Businesses have a hard month with multiple things mounting up together that reduce cash flow greatly. Losing multiple customers, having to pay out a long-term staff member’s annual leave when they depart, broken equipment needing replacement. There are all sorts of things that can go on concurrently. And when they do, unfortunately sometimes the accounts payable become tight.

It’s important to have a priority of payments that need to be made, in order from the most essential down. All suppliers should be paid on time, but making payroll on time, building rent and power are some crucial expenses to get done on time. Failing to do so can have big knock-on effects for the business. Some costs may have less severe consequences if they are a few days late - although never assume that it is alright to be a late payer just because.

These suppliers may be those with whom you have a long-term relationship, with plenty of on-time bill payments in the past. Perhaps these are the first parties you get in touch with and discuss a slightly adjusted payment date. Provided this is not a habit but an exception under extreme circumstances, you should find many suppliers understanding.

What every business needs is a clear, well-understood process for late payment of due bills. The most vital thing here is communication. If you proactively advise a supplier about the situation, they are more likely to show some leeway.

Do a review of your suppliers and recurring costs - can anything be reduced or removed?

Being able to comfortably pay all your bills each month isn’t just about bringing enough income in. There may be efficiencies and savings by conducting a close review of your suppliers. Businesses should routinely go through this - this is something RightWay does for our clients - determining where costs could be cut down.

Recurring costs usually don’t suddenly balloon up, but gradually build over time, so it’s understandable why many businesses end up with a long list of accounts payable. Whilst some costs may have been required for a period, they may no longer be needed. Take the example of a technology company, they may have a few dozen monthly software subscriptions they’ve used to conduct business. But there’s a chance that a few of these were subscribed to at one point when they were needed, and are no longer required. Even a $100 a month bill is $1,200 per year that is just wasted. That kind of cost removed can alleviate noticeable pressure on the business to cover its bills.

Pay your bills in the same way for everyone

Part of keeping bill payments simple and straightforward is to have one approach to paying everyone. There are a few ways to keep things consistent:

  • Opt for a consistent payment method, e.g. internet banking. Don’t mix and match with credit cards or instalments if you can get away with it.
  • Pay everyone out of the same bank account. This allows easy tallying up of all payments in both your bank statement and accounting software. It also makes the payment process much easier to manage for yourself or a delegated accounts person.
  • Look to negotiate the same due date for all of your suppliers. For example, if your customer’s payments clear on the 25th of the month, look to make the 26th of the month your due date. This is easier for relationship-based suppliers, but some subscription recurring costs allow control over payment dates as well.
  • Use consistent codes, particulars and references to help Xero reconcile your accounts (whilst still observing the supplier’s requested reference).
  • Have the approval date for bills scheduled with whoever is responsible on a certain day that’s blocked out in their calendar.
  • Reconcile the day after payment so that anyone reviewing the accounting records has an up-to-date view of things.



Further Reading on the topic

Here are some other useful resources from around the web:


The above information is general and does not represent tailored advice to your business. For more specific guidance, get in touch with our team who can connect you with one of our bookkeeping experts.

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