5 Best Practices in Accounts Payable

Oliver Lee
August 17, 2022
 Mins Read

Accounts Payable is defined as the collective amount of a business enterprise’s short-term obligations to pay their suppliers for the different products and services that the enterprise purchased on credit. In the current business climate, business enterprises in every sector are under tremendous pressure to perform a lot of tasks with limited resources. Therefore, businesses need to grab every opportunity they can find for freeing up their working capital. By having access to the cash which is trapped in the balance sheet, additional liquidity can be achieved through a formal working capital strategy which can help in funding growth, streamlining processes, reducing costs, enhancing the level of service and most importantly grab investment opportunities when they arise.

A study conducted by Aberdeen Group found that business enterprises that automate their accounts payable save close to 80% on cost per invoice. Apart from human resources, business enterprises make the highest investments in finance systems. As accounts payable is basically a back office function, business enterprises do not give it much importance as their main focus is building competitive advantage. Accounts payable usually takes a back seat as the enterprise focuses on different priorities. To identify opportunities effectively and to take the right decision when faced with potentially conflicting outcomes, a more strategic approach towards accounts payable must be taken by business enterprises.

There must be healthy collaboration between the senior management, accounts payable team and the relevant departments to imbibe a working capital culture throughout the company.

Here are few best practices in accounts payable:

1. Centralized AP Processing and Reporting:

Many business enterprises operate from different locations and have to pay their suppliers, vendors and service providers at every location. This can result in the enterprise duplicating their efforts and functions. By centralizing the process of handling these payments, business enterprises can save time and money through increased efficiency and productivity.

All accounts payable functions are aggregated in a centralized accounts payable system in one centralized location consisting of a single staffing group. The functions such as purchase order compilation, invoice or bill receipt, agreement tracking and trade credit approvals and bill payment processing are carried out by the staff. The added advantage of centralizing is that it enables the business enterprise to perform more tasks in a smaller time frame with minimum resources thereby reducing enterprise costs.

2. Implement Paperless Processing:

A survey conducted by Pay stream into electronic invoicing found that close to 60% of professionals felt that the key challenge to efficiency in a business enterprise is the use of paper in various tasks. Paper is an inefficient medium as it is easily lost, either in mail or in a pile of invoices. But since the past decade or so, business enterprises are largely implementing electronic data interchange (EDI) which completely eliminates paper. Secure servers are used for swapping information with each other.

However, implementing EDI can be quite expensive and cumbersome. But enterprises that automate their accounts payable systems gain significant functionality by applying electronic communication with vendors. For example, an eProcurement system allows the business enterprise to communicate electronically with customers and vendors that can be quite helpful in automatically generating purchase orders (PO) for every new order, validate and accept invoices electronically, timely payment of invoices and for tracking goods received. Depending on the selected level of automation, business enterprises will be able to automatically scan invoices, resolve disputes, track delivery receipts rather than carrying them out manually.

3. Extensive Use of Purchase Order:

The use of both purchase order and non-purchase order invoices largely depends on the business enterprise and its purchasing behavior. Accounts payable departments which strive for efficiency make it a point to use POs as often as possible. Business enterprises usually give the excuse of the difficulty of raising a PO as the reason for decreased PO production. A study conducted by Institute of Finance and Management found that business enterprises use PO for close to 51% of their invoices.

Issuing a user license for finance systems to everybody so that they can issue a PO is not financially feasible. Such licenses are quite expensive and require technical training to maintain it. Delays in raising a PO also deter staff from using them. The most feasible remedy is to use a web server where a form is placed which can be accessed from anywhere thereby allowing the staff to effortlessly request and submit a PO.

4. Create Efficient Management Workflows:

Business enterprises can drastically improve the efficiency of their accounts payable processes by creating management workflows. These workflows can help the enterprise to recognize and resolve system bottlenecks and can also be instrumental in streamlining process handoffs that can improve the liquidity management in the most efficient manner.

With workflow management, the system offers a wide range of features that allows the business enterprise to implement current objectives and seamlessly make any adjustments if those objectives change in the future. The important features of workflow management includes various invoice entry methods, collections and credit management, receipt application and reporting.

5. Maintain Item Ledgers:

A lot of time and energy is invested by business enterprises to ensure that they get the greatest possible return on investment. This is where an accurate financial record can help. A record keeping system or a ledger, irrespective of it being on paper or on a computer system, must be simple to use, easily comprehensible, reliable, consistent and accurate and must provide information on a timely basis.

Few business enterprises deal with physical products and therefore must be careful while maintaining the item IDs in the finance systems. The item ID present in the finance system must exactly match with the vendor list which can be helpful when line item scanning is carried out in the future. The periodic price list release by the vendor must be heavily scrutinized after which the finance system must be updated. Business enterprises must see through that item IDs are not recycled.

Business enterprises can streamline their processes by bringing about improvements in their accounts payable governance, consistently tracking key metrics and setting up a clear management processes thereby infusing a working capital culture within the enterprise. If business enterprises approach this in an effective manner, they can reinforce corporate cost management, minimize routine transaction risks, reduce process complexity and successfully improve vendor contract compliance. Business enterprises can even employ the services of an expert accounts payable service provider to streamline processes and achieve operational efficiencies. These best practices can help business enterprises to not only maintain operating margins but also achieve greater liquidity which can consolidate bottom line performance.

Article by
Oliver Lee

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