Managing the accounts payable process

Accounts payable (AP) refers to all of a business’s short-term outgoings and all of the upcoming bills it must pay to creditors or suppliers. Meeting these financial obligations and effectively managing cash flow (ensuring funds are always available to pay the bills) is critical for every business.

Having a firm grasp on the AP process helps you:

• Maintain a clear picture of upcoming bills and when they are due.
• Avoid late payments and any financial penalties they bring.
• Streamline AP workflows to free up time for other tasks.
• Foster strong and long-lasting supplier relationships.

Take advantage of AP software

Before we get into the ins and outs of the AP process itself, it’s important to remember that you don’t have to do it yourself. There is a wide range of tools available to simplify the AP process.

This article will focus more on the AP process itself. We’ll leave it to you to determine your specific business needs and which AP tools you ultimately decide on, such as Melio vs. QuickBooks bill pay or Xero vs Stampli.

These automated tools can help businesses of any size implement a streamlined AP process. This includes:

• Tracking invoices and making payments from a single platform using any internet-connected device.
• Scheduling upcoming payments in advance to better manage cash flow and prevent missed payments.
• Reducing manual processes and the time it takes to complete AP processes.
• Preventing costly human errors, such as late or double payments.
• Syncing AP and accounting software for a single, up-to-date set of company books.

Typical AP processes

How you manage your AP processes depends on the size of your business and which types of goods and services you use. For example:

• The number of vendors you work with.
• How many payments you make month to month.
• The documentation involved in validating purchases.
• The number of employees involved and who’s in charge of approving payment.

A typical AP workflow should include the following steps:

1. Receive approval from the necessary parties and send a purchase order to the vendor detailing the products and services ordered and the price agreed upon.
2. Take receipt of the products and services along with the vendor’s invoice detailing the goods, their price, and the payment terms.
3. Verify the quality and quantity of the goods received.
4. Generate a receiving report confirming the acquisition of the goods.
5. Perform a three-way match between the purchase order (what you wanted to purchase), the vendor invoice (what the vendor states it supplied), and the receiving report (what you actually received).
6. Approve the invoice, then schedule and process the final payment, ensuring you meet the vendor’s payment terms (i.e., deadline, payment method, etc.).

Approval workflows for the initial purchase order and the final invoice payment may vary depending on the purchase in question. It may need approval from different staff members most familiar with the purchase, for example, a chef approving the quality of the ingredients rather than someone from the business side. Or approval from someone higher up in the organization for larger purchases.

Common AP challenges

While some of these steps may seem like overcomplicating a relatively simple process, adding checks and balances to AP workflows protects your business from error and fraud. You want a smooth and efficient process that guarantees you only pay for goods and services received that meet the expected quality.

Common AP challenges include:

• Delays: Whether it’s waiting for approval internally, miscommunications, or failing to get all of the documentation to the relevant parties, AP mistakes can leave you waiting for the goods you need or make you miss a payment, incur additional fees, or ruin a relationship with a key vendor.
• Matching errors: Inconsistencies in the three-way documentation match (purchase order, vendor invoice, and receiving report) due to a mistake on your end or with the vendor.
• Incorrect approvals: Without proper controls in place, businesses can end up making unnecessary purchases.
• Fraud: Since money is involved, you must take measures to protect yourself from abuse, both internally from employees and externally from bad actors posing as legitimate vendors.
• Double payments: Sloppy AP workflows or inconsistent documentation may lead to double payments.

Use automated software to overcome AP challenges

There are several AP best practices you can follow to minimize or remove these challenges. Many of them come back to designing robust and well-thought-out processes as well as implementing adequate AP software. With software, you can automate AP to save time while also significantly reducing the likelihood of errors.

• Eliminate the use of paper as much as possible, including scanning and uploading for any clients still sending hard copies of invoices.
• Introduce checks at each stage of the process before moving on to the next, receiving input or approval from the relevant parties.
• Utilize faster and cheaper digital payment methods to improve cash flow management. Some AP platforms allow you to use these methods even when your vendors ask for checks only.
• Create a centralized hub of AP documentation to link the purchase order, invoice, and receiving report for hassle-free three-way matching on every transaction.
• With proper AP and cash flow management processes in place, it is easier to organize your finances and take advantage of any early payment discounts offered by vendors.

Save time and money with better AP processes

While it may seem like additional work at first, streamlining your AP processes can save you time and money in the long run while also reducing mistakes. Remember, you’re putting in the effort now to build a foolproof and comprehensive system moving forward that can scale with you and your business.