Efficient accounts payable (AP) management is crucial for maintaining a strong financial position in any construction company. With projects spanning months or even years, controlling outgoing payments is as vital as managing incoming cash flow. Effective AP management helps avoid late fees, take advantage of early payment discounts, and maintain good relationships with suppliers.
QuickBooks Online (QBO) provides robust tools to streamline your AP processes, making it easier to manage bills, track expenses, and maintain healthy vendor relationships. This guide outlines key AP best practices tailored for construction companies and explains how to implement them in QBO to optimize cash flow, reduce errors, and ensure financial stability.
1. Implement a Systematic Bill Entry Process
What is a Systemactic Bill Entry Process?
A systematic bill entry process involves recording all incoming bills promptly and accurately in QBO. This ensures that every expense is tracked, allowing for better financial oversight and planning.
Benefits
Implementing this process prevents missed payments, reduces the likelihood of late fees, and ensures that all expenses are accounted for in your financial reports. It also provides a clear view of upcoming liabilities, aiding in cash flow management and budgeting.
How to use in QBO
- Record Bills Promptly: Enter bills as soon as they are received.
- Use Items (Cost Codes): When entering bills, categorize expenses using items (cost codes) rather than accounts for detailed job cost reporting.
- Attach Supporting Documents: Attach copies of the original bills or documents in QBO for easy access during audits or reviews.
- Set Up Recurring Bills: Automate regular expenses by setting up recurring bills in QBO to ensure consistency.
2. Utilize Approval Workflows
What are Approval Workflows?
Approval workflows require certain bills to be reviewed and approved by specific individuals before payment is made, ensuring legitimate and authorized expenses.
Benefits
Approval workflows prevent unauthorized payments, reduce fraud risks, and ensure all bills are thoroughly reviewed. This is especially important for construction companies where project-related expenses can be substantial.
How to use in QBO
- Set Up Approval Processes: Use QBO’s integration with third-party apps like Bill.com for approval workflows.
- Customize Approval Levels: Tailor approval levels based on expense type or amount.
- Track Approvals: Monitor the approval status in QBO to avoid delays.
3. Set Clear Payment Terms with Vendors
What are Clear Payment Terms?
Payment terms are agreed-upon conditions for when payment is due, discounts for early payments, and penalties for late payments.
Benefits
Clear payment terms improve cash flow management and help take advantage of early payment discounts while avoiding late fees.
How to use in QBO
- Define Payment Terms: Create and customize payment terms in the Vendors settings.
- Apply Terms to Bills: Select appropriate terms for each bill or vendor.
- Communicate Terms with Vendors: Ensure vendors are aware of and agree to the terms to avoid disputes.
4. Manage AP Retention
What is AP Retention?
AP retention involves holding back a portion of a payment to vendors or subcontractors until project completion or milestone achievements, ensuring work is completed to agreed-upon standards.
Benefits
Retention offers security by ensuring satisfactory project completion and helps manage vendor relationships while reflecting outstanding liabilities accurately in financial records.
How to use in QBO
- Set Up Retention Items: Create service items in QBO specifically for retention amounts.
- Apply Retention on Bills: Allocate retention using the retention item, keeping it as a separate liability.
- Release Retention: Adjust or create a bill to release retained funds once the work is completed.
Check out our more detail blog Master Retention in QuickBooks Online - A Contractor’s Guide
5. Take Advantage of Early Payment Discounts
What are Early Payment Cash Discounts?
Early payment discounts are incentives offered by vendors for paying bills before the due date, typically ranging from 1% to 3%.
Benefits
Early payment discounts reduce costs and build stronger vendor relationships.
How to use in QBO
- Track Discounts: Monitor bills with early payment discounts and record the terms in QBO.
- Set Payment Reminders: Schedule reminders in QBO to pay bills within the discount period.
- Apply Discounts: Adjust the payment amount when paying bills to reflect the discount.
6. Monitor AP Aging Reports Regularly
What are AP Aging Reports?
An AP Aging Report categorizes outstanding bills based on how long they have been unpaid, such as 0-30 days, 31-60 days, etc.
Benefits
Reviewing AP Aging Reports helps prioritize payments, avoid late fees, and manage cash flow effectively.
How to use in QBO
- Access AP Aging Reports: Navigate to Reports and search for "Accounts Payable Aging Summary" or "Detail."
- Customize Reports: Customize reports by vendor, date range, or aging period to get a clear view of liabilities.
- Create Custom Reports: For critical vendors, create custom AP aging reports to closely monitor specific accounts.
7. Automate Payment Processes
What is an Automatic Payment Process?
Automating payment processes involves setting up systems to automatically pay recurring bills or notify you when payments are due.
Benefits
Automation saves time, reduces errors, and ensures bills are paid punctually, avoiding late fees and maintaining strong vendor relationships.
How to use in QBO
- Set Up Automated Payments: Integrate QBO with payment processors or bank accounts to automate recurring payments.
- Schedule Payments: For non-recurring bills, schedule payments in advance.
- Monitor Automation: Regularly review payment schedules to ensure they align with cash flow.
What RedHammer Can Do For You
At RedHammer, we specialize in helping construction companies optimize their accounts payable processes in QuickBooks Online. Our services include:
- AP Process Auditing and Setup: We ensure your AP process is optimized for efficiency and compliance.
- Vendor and Retention Management: We’ll set up vendor profiles and retention processes that meet your business needs.
- Automation and Workflow Solutions: We help you leverage the full potential of QuickBooks Online by setting up approval workflows and automated payment processes.
- Training and Support: We provide training to your team on best practices in AP management and ongoing support to ensure smooth operations.
With RedHammer’s expertise, your construction company can streamline AP processes, improve cash flow, and maintain strong vendor relationships.
Conclusion
Effectively managing accounts payable is crucial for maintaining financial stability in the construction industry. By implementing best practices such as systematic bill entry, approval workflows, proper AP retention management, clear payment terms, early payment discounts, regular AP aging report reviews, and automating payment processes, you can optimize your AP operations in QuickBooks Online.
Tailoring these practices to fit your company's needs will help maintain a strong financial position, build better relationships with vendors, and improve overall cash flow management.
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