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.
Frequently Asked Questions About QuickBooks Online Accounts Payable for Construction Companies
Why is accounts payable management critical for construction companies?
Accounts payable management is critical for construction companies because projects span months or years, requiring careful control of outgoing payments to maintain healthy cash flow and vendor relationships. Effective AP management helps avoid late fees that can significantly impact project profitability, enables companies to take advantage of early payment discounts that reduce overall project costs, maintains good relationships with suppliers and subcontractors essential for project success, provides clear visibility into upcoming liabilities for better cash flow planning, and ensures accurate job costing by properly tracking all project-related expenses. Poor AP management can lead to cash flow problems, damaged vendor relationships, and inaccurate project profitability analysis.
What constitutes a systematic bill entry process in QuickBooks Online for construction companies?
A systematic bill entry process involves recording all incoming bills promptly and accurately in QuickBooks Online to ensure every expense is tracked for better financial oversight and planning. The process includes entering bills as soon as they're received to prevent missed payments, using items (cost codes) rather than accounts when categorizing expenses for detailed job cost reporting, attaching supporting documents like original bills for easy access during audits, and setting up recurring bills for regular expenses to ensure consistency. This systematic approach prevents missed payments, reduces late fees, ensures all expenses are accounted for in financial reports, provides clear visibility into upcoming liabilities, and aids in cash flow management and budgeting.
How should construction companies implement approval workflows for accounts payable in QuickBooks Online?
Approval workflows require certain bills to be reviewed and approved by specific individuals before payment, ensuring legitimate and authorized expenses. In QuickBooks Online, implement approval workflows by integrating with third-party apps like Bill.com, customizing approval levels based on expense type or amount (for example, requiring higher-level approval for larger expenses), and tracking approval status to avoid payment delays. Benefits include preventing unauthorized payments, reducing fraud risks, ensuring thorough review of all bills, and maintaining control over substantial project-related expenses. This is especially important for construction companies where individual expenses can be significant and impact overall project profitability.
How does AP retention work in construction and how should it be managed in QuickBooks Online?
AP retention involves holding back a portion (typically 5-10%) of payments to vendors or subcontractors until project completion or milestone achievements, ensuring work is completed to agreed-upon standards. In QuickBooks Online, manage AP retention by setting up retention items under Products and Services specifically for retention amounts, applying retention on bills by allocating the retention amount using the retention item as a separate liability, and releasing retention by adjusting or creating a bill once work is completed satisfactorily. This practice provides security for project completion, helps manage vendor relationships, reflects outstanding liabilities accurately in financial records, and mirrors the retention practices clients may apply to your company.
What are early payment discounts and how can construction companies optimize them in QuickBooks Online?
Early payment discounts are incentives offered by vendors for paying bills before the due date, typically ranging from 1% to 3% of the bill amount. These discounts can significantly reduce project costs and build stronger vendor relationships. In QuickBooks Online, optimize early payment discounts by tracking bills with discount terms and recording them in the system, setting payment reminders to ensure bills are paid within the discount period, applying discounts by adjusting payment amounts when processing payments, and monitoring which vendors offer the best discount terms. For construction companies with large material and subcontractor expenses, these discounts can result in substantial cost savings that directly improve project profitability.
How should construction companies use AP aging reports to manage their payables effectively?
AP aging reports categorize outstanding bills based on how long they've been unpaid, typically breaking them into 0-30, 31-60, 61-90, and over 90 days categories. In QuickBooks Online, access these reports under Reports > Accounts Payable Aging Summary or Detail, customize reports by vendor, date range, or aging period, and create custom reports for critical vendors to closely monitor specific accounts. Effective use involves regularly reviewing reports to prioritize payments based on due dates and vendor importance, avoiding late fees by identifying bills approaching due dates, managing cash flow by understanding upcoming payment obligations, maintaining vendor relationships by ensuring timely payments, and identifying potential cash flow issues before they become critical problems.
What payment automation options are available in QuickBooks Online for construction companies?
QuickBooks Online offers several payment automation options including setting up automated payments by integrating with payment processors or bank accounts for recurring bills, scheduling payments in advance for non-recurring bills, and setting up reminders for manual payment processing. Automation saves administrative time, reduces payment errors, ensures bills are paid punctually to avoid late fees, maintains strong vendor relationships through consistent payment timing, and helps manage cash flow by ensuring payments align with available funds. For construction companies managing multiple vendors and subcontractors, automation helps ensure no payments are missed while maintaining control over cash flow timing.
What best practices should construction companies follow for vendor management in QuickBooks Online?
Construction companies should establish comprehensive vendor management practices including setting up detailed vendor profiles with contact information, payment terms, and tax details; establishing clear payment terms and communicating them effectively; tracking vendor performance including payment discount opportunities and reliability; maintaining organized documentation for all vendor transactions; implementing approval workflows appropriate for different vendor types and expense amounts; regularly reviewing vendor relationships and terms; and ensuring compliance with tax reporting requirements like 1099 forms. Additionally, companies should categorize vendors by importance and payment terms, maintain backup vendor options for critical supplies, and establish relationships that support both current projects and long-term business goals.
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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