Improving your Accounts Payable Process

Improving your Accounts Payable Process
Contents

What is the accounts payable process?

Simply put, the accounts payable (AP) process is the range of accounting activities needed to complete a purchase, from procurement through to payment. The full process includes capturing data from invoices, coding them with the correct account and cost center, approving invoices, matching invoices to purchase orders, and posting for payments.

Because AP deals with what is owed to suppliers or service providers for goods received or services rendered, it’s a vital part of your daily operations. Mismanagement of your company’s IOUs can have negative flow-on effects including penalties or late fees, damaged supplier relationships, wasted employee time from inefficiencies, and an increased chance of fraud.

What you need when developing an accounts payable workflow

Your chart of accounts

Creating a robust chart of accounts is fundamental to organizing your company’s financial information. By breaking down transactions into different subcategories, you can gain insight into the effectiveness of your spending and track exactly where your money is going.

A best practice is to keep the numbering and information standardized so anyone looking at the chart of accounts for the first time will understand it. This should include the account name, type, and description. The most common numbering for Accounts Payable, which is a Liability account is 2,000 to 2,999.

If you’ve already set one up or have a default chart of accounts within your accounting automation, it’s a good idea to check over them and add any additional subaccounts specific to your business. This will help you track your accounts payable metrics more effectively. For example, it’s useful to differentiate between trade payables for inventory, payables for subscriptions, and payables for contractor invoicing.

Set up vendor details

If you’ve added new vendors to the mix or are just starting out, record vendor details with their payment terms. Make sure to note any discounts offered for early payment so you don’t miss out on cash-saving opportunities.  

Establish cadence to repeat the AP process

Running accounts payable on an ad-hoc basis can result in missed payments and provides no visibility over when cash outflows will occur. It’s important to set a routine schedule to run the AP process—say weekly or every two weeks for businesses with fewer payment obligations—to stay on top of cash flow and ensure obligations are met in a timely manner.

Accounts payable process steps

1.      Complete a purchase order

A purchase order (PO) is a document created by a buyer and sent to the vendor to initiate the purchase. A PO essentially lists what the company wants to buy, how many, at what price, and by when. Once accepted by the vendor, it is a legally binding document.

2.      Process a receiving report

Once the goods are received, the staff accepting the goods should create a receiving report to document the contents of the delivery. The receiving report is crucial as it forms evidence of receipt required in the three-way matching process.

Ensure your report template includes the following:

  • Date and time the delivery was received
  • Name of the shipping company that delivered the goods
  • Name of each item received
  • Quantity of each item received
  • The authorizing PO number
  • Condition of the items received or damaged goods

3.      Receive the invoice

The vendor sends an invoice to the accounts payable department to request payment for the goods or services provided. The most efficient way to accept invoices is electronically to a centralized place. From here, the AP team will capture invoice data, code the invoice with the correct account and cost center, and conduct the three-way-match.

4.      Conduct a three-way match

The aim of three-way matching is to find any discrepancies between three essential documents in the purchasing process: the purchase order (PO), receiving or goods receipt report, and vendor invoice. This procedure is crucial in ensuring each payment is accurate, saving the company from overspending or paying for goods not received, and eliminating fraud.

If you haven’t automated this process, it’s a good idea to set a dollar threshold over which a three-way match is required, to avoid unnecessarily wasting your staff’s time. Or you may choose to omit recurring purchases from the process.

5.      Approval process

Once all checks have been complete, the AP team can either approve or reject the invoice or send it to authorized approvers for the final tick, before submitting it for payment.

6.      Invoice payment

Invoices are processed for vendor payment via common payment methods such as check, bank account ACH, wire transfer, or credit card. After invoices are paid, it’s a good idea to archive invoices and payment information in the GL and for audit purposes.

Steps for accounts payable process improvement

Create standard procedures

Developing a standard procedure for purchasing and spending will ensure staff across all business units know the process they need to take when making a purchase or working with a new vendor. It also ensures the AP department receives the right information they need to do their job efficiently.

If possible, consider creating a list of preferred vendors. This simplifies the process and reduces the administrative burden of onboarding new vendors since the vendor information would already be captured in your systems, and reduces the likelihood of rogue purchases.

Digitize and centralize your accounts payable data

Thanks to a new wave of AP software, there are various cloud-based solutions available that help to streamline the AP process. Current technology provides a way to scan or upload invoices and bills to capture data electronically, keep a record of previous payments in one centralized place, and schedule payment of invoices before the due date.  Digitizing your accounts payable data in a cloud-based platform means that all team members always have access to the same information.

Establish AP controls 

The AP process should have internal controls to prevent payment of fraudulent or inaccurate invoices, paying a vendor twice, and ensuring that all vendor invoices are accounted for within the correct terms.

Keep track of upcoming invoice payments

Ensure your AP team is running accounts payable aging reports to provide management with an overview of what the company owes. This report will keep you informed of who you owe, how much is due to each creditor, how long that money has been owed.

Having visibility over owed amounts is essential for managing expenses and planning cash outflows. Particularly during times when cash is tight, a real-time overview of upcoming payments can help you decide which vendors must be prioritized and which can be stretched out. Management can also use this information to identify problem areas or find opportunities to implement new strategies for improving cash flow.

A solid spend management platform that provides visibility over upcoming and recurring payments can provide the level of visibility you need.

Invest in AP Automation

Leaving the AP process in the hands of humans will inevitably result in some level of human error and also opens the process up to be susceptible to fraud. Cue—AP automation. Since this technology streamlines and eliminates manual accounts payable tasks and data entry, investing in AP automation effectively eliminates these risks and simultaneously saves you time and money.

Goldman Sachs estimates that adopting AP automation technology will result in a 60-70% net saving in invoice processing costs for SMBs. Freeing up your staff’s time also means they can focus on higher-value work.

Once your company’s AP process is automated, it will easily scale up according to growth with much less additional outlay than if you needed to keep expanding your AP team. On the flipside, and even more important in today’s volatile environment, is the ability to scale down without having to worry about layoffs.

An automated AP system digitizes and captures all invoices and can automatically pull data through to your accounting systems, providing better visibility and control over financial data.

Final thoughts

A poor AP process could lead to late payments, additional fees, and damaged vendor relationships. Take steps towards improving your AP process for better control and visibility over your company’s outgoings.


About the Author: Jemima Law
Jemima is a finance writer with a professional background in Corporate Finance. She is also a small business owner who hates reconciling business spending with a passion.