Accounts payable is an important process for all kinds of businesses, regardless of size. The majority of people, however, are unaware of the specifics of the accounts payable process unless they are actively involved in it. It is difficult to streamline or enhance this process without knowing the specifics.
Every day, businesses purchase items on credit. Unfortunately, businesses don't always have enough cash to pay for something immediately, so they track their invoices and pay off expenses when they've generated sufficient funds from selling their products and services. In theory, this is a great solution, but reviewing invoices, purchase orders, contracts, and other agreements requires extreme attention to detail.
It is the role of accounts payable. The performance of your accounts payable services can have an impact on:
Consequently, your accounts payable team and their process must run like clockwork. This article explains what and how the accounts payable process operates.
But first, let's begin with the basics - what exactly are accounts payable?
Examining and processing supplier and vendor invoices, performing financial and tax validation, entering payments into the system, and maintaining A/P reports. Simply put, accounts payable include everything owed to creditors by a business. It can include everything from freelancers billing every month to car leasing companies invoicing for your business fleet.
Typically, accounts payable refers to short-term debts, i.e., obligations expected to be repaid within a year and ideally well within the year.
Long-term debts, such as mortgages and other loans with terms exceeding one year, are typically itemized as distinct liabilities and are not included in accounts payable.
Accounts payable is a business liability. To maintain confidence in your ability to pay debts, you must manage your finances effectively and responsibly. Additionally, it is respectful to your creditors.
A company's accounts payable process is the management of its immediate payment obligations to vendors and suppliers.
Accounts payable, or AP, is the amount of money owed by a company to its vendors and suppliers for the use of its goods and services. Processing of accounts payable ensures timely payments to suppliers and vendors. The objective of the AP process is to ensure the legality and precision of all payments from the business to suppliers/vendors.
The process cycle of the accounts payable process includes invoice data capture, appropriate GL coding, a 3-way invoice match, invoice approval or flagging, and payment processing.
The AP process is a subset of the entire procure-to-pay (P2P) process, which encompasses all activity stages from purchase requisition to procurement and vendor payments.
Most organizations have a separate AP department that handles all incoming bills/invoices and vendor payments. It can involve much paperwork and person-hours spent reconciling invoices, purchase orders, and receipts.
Modern methods, such as AP automation, can assist in optimizing and accelerating entire AP workflows, freeing up person-hours for higher-value tasks.
Accounts payable is utilized whenever a business must pay a third party. This third party could be a supplier of the components a business needs to manufacture its product or a contractor providing a service to the organization or its customers. It encompasses virtually all payments made by a company, excluding payroll for internal employees.
The complete cycle of accounts payable consists of the following steps:
However, before the accounts payable process can begin, your company must first, so to speak, get its ducks in a row. First, internal accounting systems must have a chart of accounts and a list of all the accounts in an organization. Next, it is necessary to set up all vendor accounts, including names, billing addresses, billing frequency, vendor IDs, etc.
The accounts payable process can begin in earnest when these conditions are met. Let's examine each step and its requirements.
The initial accounting procedure step is transmitting a purchase order (PO). To initiate the purchasing process for any service or item you order, you must submit a purchase order to the supplier. In some instances, the PO may be a physical document, while in others, it may be a digital file.
Regardless of its format, the Purchase Order should include details such as a line item description of what you've ordered, the quantity, price, date of the Order, the date by which you require the Order, etc. Please note that purchase orders and invoices are distinct. In a later phase of accounts payable, purchase orders will be utilized.
When you finally receive the ordered goods or services, you should receive a receiving report or goods receipt. Again, this receipt can be physical or digital. Still, it must contain the following information: a list of the items received, the quantity, shipping information such as the delivery company, and the date the Order was received.
In this step, you can also report discrepancies between what you ordered and received, problems with the shipping process, and any damages. This document is also associated with a later stage of the accounts payable procedure.
After fulfilling your order, the vendor will send you an invoice. It is the official request for payment from the vendor, which can be either physical or digital, like the other documents in this process. It should include the amount owed to the vendor, sales taxes, shipping or freight fees, and the payment due date.
After receiving the invoice, the accounts payable department must ensure that it is entered into the system. It can occur in several ways. One option is for employees to enter the data into the system manually. However, this procedure is time-consuming and leaves your system vulnerable to error.
The second option is to use software with optical character recognition (OCR) technology to automate this process. OCR software can convert image files of invoices into computer-readable text files that can be easily transferred to your ERP system, saving valuable resources and eliminating the possibility of human error.
Here, the previously mentioned purchase orders, receiving reports, and invoices come into play. But, again, three-way matching is one of the most effective methods for ensuring the accuracy of your invoice payments and preventing potential fraud or financial loss.
Lastly, invoices are reviewed and approved before payment is issued. Again, this portion of the procedure is relatively simple. Depending on your business's method, however, hiccups may occur during the approval process for invoices.
Some teams still manually approve invoices. Employees must email invoices to whoever is authorized to approve invoices and await a response. Another popular approach is using software that automates the invoice routing process and allows for approval tiers. For example, suppose the person who normally approves invoices is out of the office or unable to approve within a specified time. In that case, the software will reroute the invoice to a backup approver who has been predetermined.
Frequently, these systems can also automate payment; therefore, once an invoice has been approved, the system will generate a secure ACH payment to the vendor. As a result, it saves time and aids ensure timely or even early payments, which can save you money.
Three-way matching involves comparing the information on the purchase order, the receiving report, and the invoice to ensure that they are identical. For example, both documents should have exact details, such as what you ordered, the quantity, and the cost.
Your accounts payable department and the person who placed the order will likely need to collaborate with the vendor to resolve any discrepancies. After your team has resolved those issues, or if there are no discrepancies in the match, the invoice is prepared for the next step in the accounts payable procedure.
Please be advised that non-PO invoices, which are not based on a pre-approved purchase order, are incompatible with three-way matching. In addition, processing these requires a more lucrative procedure and additional staff attention.
The accounts payable process is not as simple as many individuals believe. Several steps involve multiple parties and may require various checks and verifications. So what should you do now that you have a solid understanding of the accounts payable process?
If your business has trouble processing and approving invoices manually and paying vendors on time, automating these tasks will help you eliminate these problems. Invensis provides intelligent, user-friendly tools for streamlining the accounts payable process. With best-in-class OCR features that support straight-through invoice processing, automated approval routing, and automatic, secure ACH payments, your business will improve vendor relationships, save money, and free up staff for more important tasks.
Accounts payable is one of the most important tasks to perform correctly. Simply put, the risks are too great to leave to chance. A poor accounts payable process can jeopardize your supplier relationships and expose you to the risk of fraud.
Consider the advice in this post and how you could improve your systems to give yourself the best chance at a streamlined and responsive accounts payable process.