A little bit more about AP:
Before starting a business, you probably imagined yourself focusing on your craft and passion, and being in full control of your time. You might not have imagined yourself in the back office, handling bills–but as we all know, that’s the reality. If you’re just getting started, you need to be familiar with some important back-office terms that will help you manage the day-to-day of your business. Like AP.
AP is short for “accounts payable” and refers to open bills or invoices that you need to pay. Let’s look at a real-life example to understand what that actually means.
Billy is a jewelry designer from Albuquerque, New Mexico. She uses all kinds of materials in her designs, including gold and diamonds but also some unconventional ones like wood, aluminum, and rubber. She likes to buy her materials in bulk, so she can play around with her creations before she ends up with a final design that goes out for sale.
She orders some of the more “out of the box” materials from a vendor that sends the supplies from Phoenix, Arizona. Deliveries arrive with invoices that have to be paid within 60 days. This is now a part of her accounts payable. Billy has to ensure all the invoices are paid on time, otherwise, she might face late fees. She also needs to pay on time as she wants to keep a strong relationship with her supplier–who offers the best price.
Billy’s supplier, Jack, has a wood carving workshop. Every month, he sends deliveries to his top out-of-state business customers. He uses a delivery service. To ensure the price is reasonable, he pays a monthly fee, plus, the charges for gas and other expenses that are added after the delivery is complete. He also has to pay for rent and utilities–all of those payments make up his AP. Additionally, he has two employees and he needs to pay them–but keep in mind that payroll isn’t included in AP.
To make sure everything runs smoothly and payments go out on time, Billy and Jack must have an efficient AP process. Otherwise, things could get lost, their books could become a mess, and the whole business could find itself in a bit of a pickle. There are ways to make sure you pay on time, even if you’re low on cash. More on that in this cash flow tutorial.
A smooth AP process is crucial for any business, no matter the size. Whether you are a sole proprietor or have two dozen employees, your vendors and partners expect to get paid on time and on the set upon terms. In addition, when the AP process is efficient, you can save a lot of time each month, allowing you to focus on what really matters–your craft and passion.