Melio Explains

Melio explains: AP pains and gains

Business owners are no strangers to the pains that come along with their AP processes. Join us as we dive into some of the top pains and ways to work around them and come out on top.

Melio explains: AP pains and gains

A little bit more about AP pains and gains:

A smooth accounts payable (AP) process is crucial to the proper functioning of any business, no matter the size. However, issues sometimes arise. These include early and late payments, human error, and fraud. The good news is there are digital tools out there built to relieve some of the most common pains that come along with managing your AP.

Many business owners like to pay bills early in order to avoid missing due dates. As enticing as this may be, it depletes your cash flow unnecessarily. Let’s see some examples of why it’s important to maintain a delicate balance:

Early and late payments

Take Emily, for instance. She owns a home goods store. She owes her fabric supplier $1,500 for a recent shipment. The bill is due in three weeks. However, she decides to drop the check in the mail now to cross that item off her to-do list. That means that her cash reserves are down $1,500 dollars, putting extra strain on her company financials for the coming months. What seemed like a good decision in the moment ends up having a harmful effect on the financial health of Emily’s business.

Late payments, on the other hand, can harm your reputation, affect your relationship with vendors, and derail your credit score. While running a business is no small feat and due date slip ups certainly happen, it’s best to avoid late payments altogether.

Eduardo owns a bagel shop in Manhattan. Imagine he sends a check for $350 to Jessie, his flour supplier, two weeks before his payment is due. Much to his dismay, the check got stuck in the mail and arrived late. He gets an angry text from Jessie, frustrated that he is his second customer to miss a due date this week.

As a result, Eduardo has to pay a late fee, and Jessie warns him that if this happens again, he may have to consider halting their working relationship. While Eduardo had no bad intentions, missing his due date put a stain on their relationship, and also caused him to have to pay more out of pocket.

Bike store owner Jeff uses an AP platform that has a payment scheduling feature. This means he can sit down ahead of time, decide when he wants the funds deducted from his account and delivered to his vendor, and then put his bills out of sight, out of mind. This means his vendors always get paid on time. And he gets to hang onto cash longer.

The bottom line: Paying late can result in late fees and harm vendor relationships while paying too early can hurt your cash flow.

Human error

When it comes to bookkeeping, errors can cost businesses a lot of money. Human error (misspelled addresses, incorrect bank details, duplicate payments, etc.) is another pain that comes along with manually paying your bills. That said, they can cost businesses a lot of money in fees.

Let’s take Cleveland-based plant shop owner, Ray. He paid Allegra, his supplier, $800 for his most recent batch of seeds. While all the information on the check was correct, his handwriting was indecipherable. This means the bank wouldn’t accept the check, and Ray wasn’t notified until after the due date. So he ended up paying late, even though Allegra technically received the check on time. This is not a rare occurrence in the business world, especially when it comes to paper checks.

That said, coffee shop owner Ron recently switched to an AP platform to keep these mistakes to a minimum. It allows him to easily close the books and to always know the status of every payment. This way, he never confuses or mistakes the status of a bill.

After it’s all said and done, digitizing his AP process eliminated the need for error-prone manual typing and indecipherable handwriting by auto-saving his vendors’ details.

Risk of fraud

The list of pains goes on. The fact every vendor has their own payment preference doesn’t make things easier. Remembering who wants to get paid by credit card, bank transfer, or check is likely confusing and taking up valuable time. Add to the mix the fact that we live in a world full of bad actors, and you’re in for a wild ride. This reality means AP processes are susceptible to fraud and theft. From phishing scams to checks getting stolen from the mail, there are plenty of people out there preying on small businesses.

Melissa, owner of a woodworking shop in Ohio recently paid her wood supplier via check. Little did she know, a scam artist stole her check from the mailbox and lifted the account and routing numbers to create his own fake checks. This allowed him to steal a substantial amount of money from Melissa’s bank account.

While fraud and theft are scary, digitally managing your AP is far safer than many traditional methods. Digital payments can’t get lost or stolen, you always have a clear record of where, when, and how payments were sent, and online payment platforms also have layers of added security protocols. It’s wise however to stay alert to potential scams you might be subjected to.

Informed decisions can eliminate AP pains

At the end of the day, to make sure you maintain strong relationships with your vendors, pay on time, and keep enough cash on hand, it’s wise to make informed decisions about when and how to pay. It’s also important to capitalize on AP gains and eliminate AP pains. This way you will have more time to do what you really love-grow your business.

*The purpose of this page is solely to provide information and should not be considered as financial advice
**Melio does not provide legal, tax or accounting advice; you should consult a professional advisor before making any financial decisions.