Accounts payable represents the money you owe. Managing your AP becomes a process of receiving and recording invoices all while preparing and ensuring payment.
The AP process can quickly become overwhelming. The solution? Automation software catered to your business needs.
Keep reading to learn about the AP process and benefits to automating it.
Put simply, the accounts payable (AP) process covers the steps from purchasing goods/services to paying the vendor.
The full cycle accounts payable process, or the accounts payable cycle, is one part of the Procure to Pay, or P2P cycle.
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Steps of the accounts payable process |
| 1. A purchase order (PO), a document that details requested product, quantity and price, is issued to a vendor to create an order. |
| 2. The supplier will send an invoice for the goods/services ordered. |
| 3. The purchase order is cross referenced with the vendor invoice to ensure accuracy and updated in the accounting journal. |
| 4. Goods/services are received with receipt. |
| 5. A three-way matching is done to ensure accuracy between the PO, invoice, and receipt. |
| 6. Payment is authorized to the seller. |
| 7. Once payment is received on the vendor’s end, the accounting journal is updated. |
The AR team is responsible for paying vendors, receiving invoices, obtaining payment approval, scheduling B2B payments, ensuring accuracy, and updating the books.
Accounts payable management is important because it’s a fundamental part of your company’s finances and mismanagement can cause various issues.
Without proper management you are leaving your business finances vulnerable to cash flow issues, fraud, and inaccurate accounting books.
By ensuring accuracy in the AP process you can: Keep your money flowing in a healthy way, avoid late fees and strained vendor relationships, and reduce financial malpractices.
What’s the difference between accounts payable and accounts receivable anyway?
Accounts payable (AP) are the amount of money your business currently owes.
Accounts receivable (AR) are money owed from customers for goods or services already provided.
In the AP process, the purchase you ordered is payable to you, and a receivable to the seller. AP and AR show up on your balance sheet, with AP as a liability and AR as an asset.
Contrast this with the accounts receivable process.
Time delays can occur in all the steps of the AP process, creating time wasted, missed due dates, and late fees.
Manual processes create time delays and difficulty tracking the status of payments. This issue is only exacerbated as the business grows and more expenses are added to the AP pile.
During the AP process, you encounter many steps that require matching — which is simply cross-referencing one document with another (or others) to ensure accuracy.
For example, once goods are received, you would do a three-way matching with the PO, invoice, and receipt to ensure all the details across the three documents are accurate.
Exceptions occur when an invoice is incorrect or incomplete and discrepancies during matching checks. Managing exceptions adds additional time to your AP process, and causes delays in sending payment.
An AP process with inadequate controls can exacerbate problems of unauthorized and unnecessary purchases. Having clear policies and procedures around invoice approval reduces the amount of money spent inappropriately by credit cards or to unauthorized suppliers.
Fraud and theft is a challenge in all financial processes. Without clear policies and an overwhelmed manual AP process, check fraud and email scams can waste money.
According to a report done by Association for Financial Professionals, AFD, 58% of respondents noted that their AP department was compromised through email scams. This report indicates that AP teams continue to be most susceptible to email scams.
Missing documents can be challenging to manage, especially if your AP process is manual. Lost documents lead to unpaid invoices and/or inaccurate matching, which inevitably creates inaccurate financial statements.
It can be challenging to stay on top of paid invoices and unpaid ones — especially if you are using a manual process for your AP, or you are using multiple accounting softwares that don’t sync in a central system. Duplicate payments lead to wasted capital and confusion.
Manual processes might work for small businesses with limited invoices, but to grow sustainably, AP automation software allows you to stay on top of your AP process without creating errors from an inefficient process.
If your AP process is reliant on manual processes, you might encounter blind spots due to the lack of visibility on your AP process, such as the status of invoices and payments.
This lack of visibility increases the risk of late payments, as it’s complicated to keep track of the statuses and schedules of many payments.
Accuracy is the most vital part of sustainably managing your accounts payable process. Accuracy can be improved by implementing financial software into your process which removes manual data entry and thus decreases the susceptibility of human error.
Key steps in the AP process are:
To effectively manage your AP process, it’s helpful to have a centralized platform. Set up standards and common practices with a shared service.
Create a payment schedule based on your cash flow needs and vendor terms. Adhering to this schedule will determine your AP turnover ratio.
Set up clear policies for approvals. Implementing automation can speed up payment authorization.
With payable automation you improve the efficiency and accuracy of how you process invoices.
Overall, AP software creates efficiency in your process and reduces the effort needed. Here are the benefits of implementing AP automation:
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Overall, the AP process can get complicated as your business grows. Adding payable automation software can save you countless hours and simplify your finances.