Managing invoices, payments, and vendor relationships simultaneously can be overwhelming. For many business owners, accounts payable management is one of the most frustrating and time-consuming parts of running a company.
While accounts payable might not seem like the most important aspect of running a business, inefficient AP processes can lead to late payments, damaged vendor relationships, and cash flow problems, which can seriously impact your business's financial health.
Therefore, an efficient accounts payable process is essential.
In this article, we'll break down the accounts payable process into clear, manageable steps and show you how to build an efficient AP workflow. We'll explore each stage of the process and discuss how modern automation solutions can transform your accounts payable process.
An accounts payable process is the process by which a business handles the bills and invoices it incurs for the goods and services it purchases from external vendors. The main steps in the AP process include:
● Invoice receipt and data entry
● Approving invoices
● Processing payment
● Recording transactions
AP processes serve as a bridge between a business and its suppliers, ensuring a company pays its suppliers in a timely and accurate manner. This makes the accounts payable (AP) process fundamental to a functioning and efficient accounting system.
Optimising accounts receivable and accounts payable processes is crucial for helping businesses maintain a healthy cashflow. By efficiently managing money owed to suppliers, companies can gain better control over their cash outflows and ensure they have sufficient funds to meet short-term obligations. This is particularly important for small and medium-sized businesses, where cash flow can be a constant challenge.
An effective AP process also helps companies build and maintain strong relationships with suppliers. By consistently making timely payments and communicating effectively with vendors, businesses can build strong relationships with partners, which can result in more reliable supply chains, lower prices, and early payment discounts.
A high accounts payable turnover ratio can also show suppliers that a business frequently pays invoices on time, which can help with negotiating more favourable payment terms in the future.
The accounts payable process also plays a vital role in financial reporting and decision-making. When an accounts payable department accurately records and tracks all outgoing payments, businesses can generate accurate financial statements, monitor spending trends, and make informed decisions about future expenditures and investments.
The accounts payable process begins with the receipt of invoices from suppliers. These invoices can come in various formats, such as:
● Paper invoices
● PDF invoices attached to an email
● XML and EDI e-invoices
Once received, the AP department enters the invoice data (e.g., supplier name, invoice number, amount, and due date) into the company's accounting system. This can be done manually, however, manual data entry is time-consuming and prone to human error, which can lead to mistakes such as duplicate payments.
Alternatively, companies can use automated data capture methods like OCR-powered receipt scanning apps. OCR technology automatically scans and extracts relevant information from invoices, reducing manual data entry and improving accuracy.
After the AP department records the invoice data, the next step is invoice approval and validation. AP teams must match the invoice with the corresponding purchase order and receipt to ensure that the goods or services were received and that the prices and quantities are accurate.
The accounts payable team must carefully review each invoice and identify any discrepancies, such as incorrect pricing, missing information, or duplicate invoices. These discrepancies must be resolved before the invoice can be approved for payment. This step is crucial for preventing fraudulent invoices and maintaining good vendor relationships through accurate payments.
Once the invoice is approved, the payment processing and execution step begins. The accounts payable team must select the appropriate payment method based on the supplier's preferences and the company's policies.
Common methods for invoice payments include checks, electronic payment methods, and credit card payments. Payments are then scheduled according to the agreed-upon terms, taking into account any early payment discounts and the company's cash flow considerations. Businesses must issue payments on time to avoid late fees, maintain a good credit standing, and preserve positive vendor relationships.
The final step in the accounts payable process is recording the transactions in the general ledger. This involves updating the accounts payable account to reflect the amount owed to the supplier and the corresponding expense accounts.
These transactions will also be reflected on the company's balance sheet, which provides a snapshot of its financial position at a given point. Accurate and timely recording of accounts payable transactions is essential for maintaining financial control, generating reliable financial statements, and making informed business decisions based on accurate data.
To create an efficient accounts payable workflow, businesses should:
● Set clear guidelines: Clear policies and guidelines ensure consistency and reduce confusion among team members. This includes defining approval hierarchies, setting payment terms, and outlining the steps for handling invoice exceptions.
● Maintain accurate vendor data: This involves regularly updating vendor contact information, payment terms, and tax IDs. Prioritising accurate vendor data reduces payment errors and delays, strengthens vendor relationships, and ensures compliance with tax regulations.
● Review AP reports: Regularly reviewing and reconciling AP reports is also important. AP reports show outstanding invoices and their due dates, helping businesses prioritise payments and avoid late fees. Reconciling these reports with the general ledger ensures accuracy and identifies any discrepancies.
● Collaborate across departments: Effective communication across departments leads to a more efficient AP workflow. The AP team should work together with procurement and other departments to streamline the AP process. Procurement can help negotiate favourable payment terms and resolve invoice discrepancies, while employees in other departments can prioritise the timely submission of receipts.
● Focus on continuous improvement: This involves tracking key performance indicators (KPIs), such as invoice processing time and payment accuracy, and identifying areas for improvement. Regular process reviews and employee training can also help optimise the AP workflow and ensure ongoing efficiency.
ExpenseOnDemand, a leading accounts payable automation software, offers a range of features that make managing accounts payable easy. By digitising the entire expense process, from receipt capture to reimbursement, the software eliminates manual data entry and reduces the risk of errors.
Employees can easily submit expenses from their mobile devices, while managers can review and approve them with just a few clicks through a customised expense approval workflow. This accounts payable automation system saves time, reduces paperwork, and ensures expenses are processed quickly and accurately.
ExpenseOnDemand also integrates seamlessly with popular accounting systems, such as SAP, Oracle, and Xero, allowing companies to sync their expense data with other financial systems in real time. This eliminates the need for manual data entry and ensures that expense information is accurately reflected throughout all departments.
By leveraging these digital tools, companies can optimise their accounts payable processes, reduce costs, and improve efficiency.
Book a demo with ExpenseOnDemand to automate your accounts payable process.
Connect With Us
%201.png)
-transformed.png){kind=spacer}