Timely vendor payments help you in maintaining a healthy relationship with your vendors and suppliers. What’s more, vendor payments are integral to accounts payable management, and business owners must never take it lightly. Since it is the most crucial part of the procure-to-pay process, one must fully understand what vendor payments are and why they are essential for an organisation’s smooth running.
Accounts Payable Function
The accounts payable is the most important financial transaction in any firm. That is because accounts payable is responsible for almost all payments, except payroll.
A bookkeeper or a small team takes care of vendor payments in small or medium-sized organisations. However, in large organisations, a dedicated accounts payable department handles it.
What are Vendor Payments?
The process of paying vendors or suppliers for goods purchased or for services is called vendor payments. Vendor payments are commonly known as accounts payable or invoices to pay. The vendor payment is the final action and is the last process in the purchase-to-pay cycle of a firm.
Why are Vendor Payments Important?
To build a positive connection with your suppliers and vendors, you must manage the vendor payments in your firm promptly and systematically. This way, you can forge healthy relationships with all the vendors your firm does business with.
Furthermore, by having a systematic vendor payments method in place, you can steer clear of late payment penalties and interests. Also, in the long run, it helps you run your business smoothly.
When your firm is involved in the following services or transactions, vendor payment management is essential:
- Your firm has a large number of vendors to deal with
- When you make vendor payments in multiple currencies
- When there are numerous branches from where the payments are made, you need to monitor the cash flow
- When the credit period is changed
- Sale and purchase of goods from the same seller, needing offsetting of liabilities
- When you have to make timely payments to comply with the GST and MSME Act
Vendor Payment Process
In short, the process begins when your business orders goods or services from a vendor or supplier. You then create a purchase order for the vendor. After you receive the goods or services ordered, you will get an invoice from the vendor. The last step is the vendor payment, where you make a payment towards the invoice the vendor or supplier sends you.
As mentioned earlier in this post, a dedicated team takes care of the vendor payments in large firms. In small and medium-sized firms, a small group or sometimes just an individual is responsible for this.
Here is the step-by-step process of how a vendor gets paid:
The first step in vendor payments is collecting the invoice from your vendor. If your vendor is yet to send your invoice, first collect it.
Now verify and check for authenticity. Make sure the invoice has the approval of the vendor’s authorised signatory.
Next, make a journal entry in your accounting or ERP system and account for the invoice. Then, calculate and account for any taxes that may be applicable, such as the input tax credit (ITC) under Goods and Services Tax (GST) and TDS under the income tax.
Ensure you deposit TDS with the government within the due dates set by the Income Tax Rules. Also, in the GSTR-3B form that is submitted on a monthly or quarterly basis, report any such ITC wherever applicable.
Furthermore, with the purchase register, conduct reconciliation of GSTR-2A and GSTR-2B at defined intervals. If the vendors have uploaded invoices for which you can claim ITC, follow up and make sure they report them in their GSTR-1.
Next, before the invoice due date or on the due date, make the payment or initiate the payment for the invoice after taking approval of the authorised signatory.
Now, make the vendor payment, remove the TDS deducted and record it in the accounts book. Then pay by UPI, bank transfers, e-commerce payment gateways, e-wallets, cash, mobile payments, or any other mode that suits you and the vendor. You can use the payment voucher here to make the record. After the payment is made, collect the receipt from the vendor and record it in the account books.
How to Effectively Manage Your Vendor Payments?
The world is transforming digitally. You no longer have to use archaic methods like spreadsheets to calculate TDS during vendor payments. Today there are many technology-based solutions at the disposal of large enterprises.
Here are the advantages of using tech-based solutions for vendor payments:
- Using technology, you can now automate approvals within specific timelines
- You can have a digital trail and also be audit-ready
- Bill payments are now hassle-free. There’s less or no manual intervention
- You can now track cash flow within your organisation quickly
- It prevents duplication of invoices and payment entries
- It can help increase your team’s efficiency and productivity
- The chances of error are much lesser
Many business owners out there are yet to automate their vendors and digitise their vendor payment methods. If you are one of them, it is high time you make the switch. From smooth transactions to simple processes, there are multiple advantages to automation and using digital payments.
Before choosing and implementing a vendor payment system in your firm, analyse its pros and cons. Make sure the method you select fills the gaps and is better than your existing vendor payments system. Also, ensure the solution you choose has multiple features and is best suited for your business.
Frequently Asked Questions
What is a vendor in accounts payable?
A vendor is a business or a person who provides goods and/or services to your business in an accounts payable context.
What is vendor payment?
In an organisation, vendor payments are the process of paying suppliers or vendors for the goods delivered or services rendered.
How are vendor invoice payments made?
A vendor raises an invoice to request payment for the goods or services. The invoice will have details such as the amount to be paid, taxes, delivery charge, date of payment, mode of payment, etc. The customers must pay the vendor after receiving the invoice. Post the payment, vendors, as proof of payment, create receipts.
What is vendor reconciliation?
The reconciliation of the vendor’s accounts payable with their invoices is vendor reconciliation. This process ensures no inconsistencies or discrepancies in the amount billed by the vendor and the products or services they offer.
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