Whether you are a small business or large, managing the Accounts Payable process is crucial to running a business. Accounts Payable (AP) refers to the money that a company owes to suppliers or vendors for goods or services received but not yet paid for. An effective AP process ensures that Purchase Orders (POs) are submitted accurately, invoices are received and processed quickly, and suppliers get paid on time. In the past the Accounts Payable process was handled manually however thanks to automation technology, managing these procedures can now be done much faster and with more ease, efficiency, and accuracy.
Here we'll look at Accounts Payable automation, including how it can help organizations to optimize their cash flow as well as the tools and technology that can help streamline your AP workflow.
Every time that your organization makes a purchase, the amount that you owe is added to your Accounts Payable balance and recorded as a liability on the organization's balance sheet.. The Accounts Payable process refers to the set of guidelines and tasks involved in managing and paying the bills and invoices that a business owes to its suppliers or vendors. The process typically involves several steps, such as verifying information on the vendor invoice, entering data into the accounting system, obtaining payment approval, and issuing payments.
An effective, streamlined Accounts Payable process ensures that vendor payments are sent and received as efficiently as possible.
AP expenses are what a business owes to its vendors, suppliers, or creditors for goods or services it has received but not yet paid for. For example:
Once payment for these expenses is made in full, the line item and expense is removed from the Accounts Payable account and recorded as a cash outflow on the company's financial statements.
Proper management of the AP process is critical for maintaining good relationships with suppliers, avoiding late fees and penalties, and ensuring accurate financial reporting. However, for the processes to be effective, the organization also requires good vendor management including accurate, up-to-date vendor information. A solid relationship with your vendors can minimize payment errors, improve pricing and ensure prompt delivery of goods and services.
The Accounts Payable process features several key steps that can affect a business's financial health. These steps include:
Following these steps can help ensure there is sufficient cash flow, track expenses and ensure compliance with regulatory requirements, improve relationships with vendors, and even assist with preparing financial statements and tax returns.
If the organization has a high level of Accounts Payable, it owes a significant amount of money to its vendors and suppliers. This can adversely impact cash flow as the organization will need to meet these payments in the future. If the organization lacks sufficient cash flow to cover these payments, it may struggle to pay its bills, which can seriously impact vendor relationships and even have legal consequences.
On the other hand, if the organization has a low level of Accounts Payable, meaning it owes less money, this can enhance cash flow as the organization has fewer payment obligations. Therefore it is to the business's benefit and long-term financial health to optimize their cash flow by streamlining the invoice processing and payment workflow. This can be done through AP automation.
While AP processes refer to the steps involved in managing and recording a company's financial obligations to its vendors and suppliers - the actual tasks that need to be carried out - AP procedures are the documented instructions that govern how the payable team these processes are carried out. AP procedures also provide guidance on the tools and systems used to perform the processes.
That said, there are several AP procedures that businesses should follow to ensure accuracy, efficiency, and compliance with all relevant accounting standards and regulations.
Establish An Accounts Payable Policy
Create a policy summarizing the company's accounts payable process, including the correct procedures for receiving invoices, reviewing and approving invoices, payment terms, and communicating with vendors. All employees and vendors should know about this policy to ensure overall compliance.
Invoice Verification
All invoices that come in should be matched with the correct purchase order for goods received, including the unit price, order quantity, and total invoice amount.
Invoice Approval
Establish an efficient invoice approval system encompassing review and approval by authorized staff.
Payment Processing
Implement a payment processing system to confirm the payment amount is accurate and that the payment is processed within the previously agreed terms.
Vendor Management
Create a system for managing vendor relationships, including regular communications, monitoring vendor performance, and identifying and resolving issues.
Month-end Closing
Perform a monthly review of all accounts payable transactions and reconcile them with vendor statements to ensure transactions are recorded properly, and the accounts payable balance is accurate.
Several tools and technologies are now available to help organizations streamline the accounts payable process and here are some examples.
Accounts Payable automation reduces the need for manual data entry, minimizes errors, and speeds up the overall approval process. It can also provide real-time visibility into payment status, helping organizations identify potential issues and improvement opportunities.
EIPP lets vendors submit invoices and receive payments electronically, helping to speed up the process and avoid errors.
PO Automation automates creating, approving, and reconciling purchase orders, invoices, and receipts to streamline the purchase order process.
Various payment processing tools are available to help automate the payment process, such as electronic payment options like ACH (Automated Clearing House) transfers and virtual credit cards.
If you want to improve your organization's accounts payable procedures and increase efficiency and accuracy, here are some best practices to implement.
Adopt An Electronic Accounts Payable System
Electronic accounts payable systems can automate invoice receipts, payment, and reconciliation processing and reduce the need for manual data entry, significantly improving efficiency and reducing processing time and the risk of errors.
Create Clear Policies And Procedures
Establish thorough Accounts Payable processing policies and procedures to encompass invoice receipt, review and approval processes, payment terms, and vendor communication.
Introduce Internal Controls
Ensure robust internal controls to reduce errors and fraud by separating duties across different employees, establishing invoice and payment approval procedures, and conducting regular transaction reviews.
Streamline Invoice Processing
Invest in streamlined invoice processing that includes confirming accuracy, reconciliation, and obtaining appropriate approvals before payment.
Use Data Analytics
You can use data analytics to identify areas within the accounts payable process requiring improvement, such as payment accuracy, invoice processing time, and vendor performance.
Here are 7 best practices for companies to follow that will help master their AP processes, minimize errors and fraud, and ensure on-time invoice payments:
Accounting procedures must comply with several regulatory requirements, including labor laws, tax, and industry-specific standards. The consequences of failing to comply with regulations can be severe, including substantial financial penalties, prosecution, and reputational damage. Here are some best practices to help achieve compliance:
In summary we can conclude that mastering Accounts Payable processes is critical for businesses of all sizes. Having a streamlined AP process ensures that purchase orders are submitted accurately, invoices are processed quickly, and suppliers are paid on time. A key factor in accomplishing this is to establish standard AP procedures that ensure accuracy, efficiency, and compliance with all accounting standards and regulations.
While all of these are things that can be handled manually, implementing an AP automation system is one of the best ways to optimize your company's cash flow.
If you want to simplify your invoice processes, save time and money, and eliminate errors, contact Yooz today to learn how we can transform your accounts payable procedures and help your business thrive.