Whether you’re building a seed-stage startup or you’re an executive at an established company, four letters probably give you mixed emotions: AP and AR. AR (accounts receivable) likely feels more favorable. Who doesn’t like to see money coming in? AP (accounts payable), on the other hand, is often a less fun category.
That doesn’t make it any less important. In fact, the way you manage the money going out of your company can make or break you. Your payables impact your runway, cash flow, ability to maintain your team, and more. It’s hypercritical.
And in our ever-evolving world, it’s not enough for companies to only invest effort in fine-tuning the way they manage their accounts payable. Thanks to the rise in remote teams, spend management has become an increasingly important category. And once your company scales to a certain point, strong procurement practices become meaningful, too.
Clearly, there’s a lot to consider here.
Accounts payable
| “To put it simply, AP is the process of companies receiving bills from their vendors and paying those bills.”
— Akshay Shrimanker, Founder and CEO, ShayCPA |
If putting the letters “A” and “P” together makes you feel a bit tense, it’s for good reason. AP is a liability account – it’s money your business owes to others.
The payables in this account function like an extremely short-term loan. It’s different from an expense you pay immediately, like the staples you paid for at checkout at the office supply store.
If a vendor gives you 30 days to pay an invoice (i.e., net 30 terms), for example, you have a short-lived line of credit from them. By the end of that payment term, though, you need to remit what you owe – or you risk damaging the vendor relationship and your business’s creditworthiness.
That means that vigilance is paramount here. Assuming your company has sufficient cash flow to make payments by their pay-by dates, do so. You don’t want anything slipping through the cracks. That’s why, for companies large and small, a strong accounts payable process matters so much.
A basic AP process
This might seem rudimentary, but it’s worth walking through the four basic steps of a strong accounts payable process.
Specifically, companies often have the middle two steps down pat, but the proper recording of both the payable and its payment can be trickier than a lot of people expect. At a tech company where everyone’s moving quickly, it’s easy to miss details.
Knowing that, we want to briefly overview what’s required to best move a payable to paid.
- Set up a Centralized Workflow. Create an inbox like [email protected] to house any invoices and bills. Have your team share invoices in this one centralized location to help organize and track, so your finance team doesn’t have to chase vendors for bills. This also sets a good practice for founders to keep track of the vendors they are working with.
- Record the payable. As soon as is feasible, any bill, invoice, subscription, lease, etc., should be recorded in the AP system. It should then be appropriately categorized. If the payable arises because you’re buying equipment, for example, it should be recorded as an asset, not an expense. If the bill contains costs from multiple different categories, it should be appropriately coded (learn more in the “Coding” section below). The payment due date should be recorded alongside the payable. It’s also important to have vendors complete Form W9 for domestic vendors – think your law firm, consultants, etc, or Form W8-BEN in the case of a foreign vendor. It’s best practice to collect this document BEFORE you pay your vendors to make tax time easier.
- Approve the payable. Most companies set thresholds below which this step can be skipped. If the payable is less than $500 and from a known vendor, for example, you might apply an automatic approval to move forward with payment. Other companies establish a list of known payables (e.g., lease, insurance, utilities) and greenlight the AP team to remit payment without additional approval. To protect cash flow and prevent fraud, though, it’s best practice to have AP approval processes in place for larger and less common payables. In smaller companies, this is usually the founder or head of finance. As the company scales, the approver is often someone high up in the AP function, along with a department head like VP of Sales or VP of Marketing. Either way, with a built-in approval process, a decision-maker can review the outflow of cash before it leaves the company coffers.
- Pay it. Technology has made this easier. With software platforms, the vendor can often input their bank information or collect your payment method (e.g., credit card info) to prevent you from having to mail a check. In addition to the “how” of payment, it’s also important to consider the “when.” If your company has plenty of cash on hand, you might have your team remit payment as soon as payables are received. Most businesses take a different tack, though. Using the full payment term extends cash flow for the company. If a vendor gives you net 30 terms, waiting to pay until the 30th day means that money stays in your accounts — and available for other uses — for as long as possible. It should go without saying, but it’s important, so we’ll mention it: if you defer payment until the end of the extended term, it’s important to have someone on top of tracking that and making the payment by the due date.
- Record the payment. Once payment is made, it needs to be captured in your AP system. The last thing you want is to make a double payment because someone missed that the first one was sent out. Payment recording is about more than avoiding simple mistakes, too. Sometimes, the month in which you send money for the payable isn’t the month in which you should record the expense. With a lease, for example, you often pay in annual chunks, but you should recognize the expense monthly as it’s actually incurred. (We delve more into this in the “Expense Recording” section below.)
This is a rough outline of an AP process. Tailor it to your company and its unique needs and payables.
As you do so, make sure you capture that process. You might think it’s fine to function as institutional knowledge, but documentation is key as your company scales. With things written down, new hires get a roadmap to follow. And even seasoned team members get support they can reference as needed.
If your company doesn’t have the internal bandwidth to manage all of this, it’s a good sign you would benefit from working with an accounting firm. That team can act as your AP clerk, reviewing the invoice, capturing it in your AP system, setting up new vendors in your payment system, and working with the appropriate stakeholders to get approval.
As an added benefit, some CPAs also offer process documentation services. That means they can help you capture your AP process so that your whole team can adhere to it.
Special AP considerations for tech companies
At its core, AP is simple: someone sends you a bill, you pay it. As you get into the work of managing payables, though, complexities often arise. That’s particularly true for tech companies.
Based on our years of experience here, we wanted to highlight a few things all tech company founders and finance decision-makers should keep in mind:
Expense recording
We’ve talked extensively about revenue recognition because it’s so important for tech companies. Say you sell a 12-month software license to a client. Per generally accepted accounting principles (GAAP), you don’t record the full revenue of that license in the month the client pays it. Instead, you break it into 12 pieces and record each month’s worth of revenue as it’s earned in the respective month. Failing to recognize revenue as it’s earned skews your financials, making it harder to analyze and plan.
The same is true on the opposite side of the coin. If a vendor sends a bill for a 12-month contract or an insurer bills you for an annual premium, you shouldn’t record the full expense on your profit and loss (P&L) statement in the month that bill was paid.
Instead, use accrual accounting practices here. Mark it as a prepaid expense, then recognize 1/12 of the cost in each successive month. Meanwhile, be tracking your prepaid expense balance, reducing it over time as you recognize that expense on a monthly basis.
This adds extra bookkeeping work, but it’s important to take on in order to keep an accurate view of your company’s true financial standing.
Fortunately, two things can help all tech companies here: your CPA and other technology providers. Our team at ShayCPA handles expense recognition for our clients, for example, and we use the accrual tool from FinOptimal to automate the management of clients’ prepaid expenses.
Coding
When a bill is received, coding is a way for you to allocate/bucket an expense into a category in your Chart of Accounts. This way, when you look at your financial statements, expenses are neatly organized either as expenses on the Income Statement (P&L) or booked on your Balance Sheet as Assets.
Say, for example, that your tech company just went through a $5 million round of fundraising. After the deal wraps up, you get a bill from your attorney to the tune of $100,000. The bill breaks down as follows:
- $20,000 for General Matters
- $80,000 for the Series Seed Fundraising
To properly account for the expense, you’ll want to code the bill into two parts:
- General legal services ($20,000): This portion should be coded as a regular legal expense on your P&L
- Fundraising-related legal fees ($80,000): This portion should not hit your Income Statement but your Balance Sheet; it should be coded as a contra-equity account, reducing the total proceeds raised by lowering your Additional Paid-In Capital (APIC).
By categorizing the bill this way, you’re aligning your accounting with GAAP principles and ensuring your financials are accurately reflected. Additionally, properly coding any payables that come through your AP processes helps you best understand where money is going. That visibility is critical for both budgeting and financial planning and analysis (FP&A).
Approvals
Every company benefits from having a tiered approval structure for its AP. This allows low-level payables to be promptly handled by the finance function, while keeping costly expenses visible to the right decision makers.
We often see our tech clients establish an approval structure that looks something like this:
| Payable Cost | Approver | Examples |
| ≤$500 | Not needed | Office supplies, business lunches, basic IT equipment like keyboards |
| $500–$10,000 | Finance director | Software subscriptions, marketing campaigns |
| $10,001–$50,000 | CFO or founder (depending on company stage) | Enterprise software licenses, sizable vendor invoices |
| >$50,000 | CFO + CEO or founder + head of finance function (depending on the company stage) | Capital equipment, cloud services, legal counsel during fundraising |
For very large payables (e.g., ones over $250,000), tech companies can protect themselves by seeking board approval, too.
This kind of tiered approval system doesn’t just put the right eyes on larger payables. It also helps to prevent fraud. By separating the person recording the payable from the person paying it, you make it harder for team members to funnel money away without your knowledge.
Additionally, approval processes help you prevent money from going out when it shouldn’t. If you’re paying for a software subscription but the platform has been buggy and not fulfilling your needs, the approval process allows for careful review and consideration, which gives your team the opportunity to flag that problem. You then have the opportunity to choose not to renew your subscription – or at least to wait to remit payment until the software provider corrects the issue.
Payment terms
As we mentioned up top, accounts payable function like short-term loans. As an added bonus, they’re interest-free. Taking advantage of the full window for payment has its advantages.
Cash management is a critical practice for companies of any size, but it’s particularly key for startups. Let’s say it’s April, and you know you have money coming in through subscription renewals in October. You still need to be able to pay your team, your vendors, your utilities, etc., in the meantime. Future money does you very little good. You need cash on hand.
Taking advantage of your payment terms helps you extend your cash flow. Net 30 terms are pretty standard for tech companies. That means you have roughly a month to keep that cash in your accounts. That gives you a month to be earning revenue before you have this outflow.
That’s helpful for tech companies because they often have payment terms of at least net 30 with customers. You don’t want cash to be coming into your company more slowly than it’s leaving, so using the full term window offers a measure of protection.
Particularly for earlier-stage companies, negotiating longer payment terms can be a big help. If you have a good relationship with any of your vendors, you might ask if they’d be willing to give you net 60 or even net 90 terms.
Getting AP Right Sets Your Company Up to Scale
Accounts payable may not be the most exciting part of running a tech company, but it’s one of the most consequential.
A thoughtful AP process supports healthy cash flow, accurate financials, and stronger decision-making as your business grows. From recording and coding expenses correctly to enforcing approvals and using payment terms strategically, the details matter more than many teams realize. If managing payables is starting to feel reactive or time-consuming, it may be a sign that your processes need refinement, or that it’s time to bring in outside support.
Either way, investing in strong AP practices now can help protect your runway and position your company for long-term success.
Need help tightening up your accounts payable process? Our team works with tech companies at every stage to build scalable AP workflows, ensure accurate expense recognition, and take day-to-day payables off your plate. Get in touch to see how we can support your finance operations.
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