In the intricate world of business finance, the accounts payable process plays a critical role. This article delves deep into the accounts payable process, offering a handy guide on what it is, why it’s critical, the challenges it poses, and how to streamline it for better efficiency. We’ll also explore how you can manage this process on autopilot using innovative solutions like Zapro.
The accounts payable process is a crucial component of a business’s financial operations, tasked with managing short-term liabilities. These liabilities typically include money owed to suppliers and vendors for goods or services that a company has received but not yet paid for. Hence, mastering this process is vital to maintaining a healthy cash flow and nurturing positive relationships with suppliers.
What is Accounts Payable Process?
The accounts payable process is a series of procedures involved in settling a company’s debts with its suppliers and vendors. The process begins with receiving an invoice from a vendor and ends with making payment and recording the transaction in the accounting ledger.
The full cycle of the accounts payable process comprises numerous stages, such as:
- Receiving the invoice from the vendor.
- Reviewing the invoice for accuracy and compliance with the purchase order.
- Approving the invoice for payment.
- Processing the payment to the vendor.
- Recording the transaction in the company’s general ledger.
It’s worth noting that the complexity and length of each step can vary depending on the company’s size, the volume of invoices, and the existing internal controls.
Why is Managing Accounts Payable Important?
Effectively managing the accounts payable process is crucial for several reasons:
- Maintains Supplier Relationships: Timely payments signify a reliable business partner, fostering a healthy relationship with suppliers.
- Prevents Late Payment Penalties: Prompt payments help avoid late payment fees, penalties, or a deteriorating credit rating.
- Controls Expenditure: By tracking every invoice and payment, the company can keep a check on overspending and prevent duplicate payments.
- Ensures Audit Compliance: An efficient accounts payable process helps maintain accurate financial records, which are essential during audits and tax assessments.
- Enhances Cash Flow Management: By keeping a close eye on liabilities, businesses can better manage their cash flow and make informed financial decisions.
Accounts Payable Process Flowchart
Understanding the accounts payable process can be facilitated through a flowchart. Here’s a simplified representation of the standard process:
1. Receive Supplier InvoiceÂ
2. Match Invoice with Purchase Order
3. Approve InvoiceÂ
4. Process Payment
5. Record Transaction in General Ledger
In a more advanced scenario, the process may also involve additional steps like receiving a purchase order, verifying goods or services delivery, and performing a three-way match between the purchase order, delivery receipt, and invoice.
Full Cycle Accounts Payable Flow
The full cycle accounts payable process flows in two directions: upstream and downstream.
Upstream: This phase encompasses procurement activities, strategic sourcing, supply chain management, and contract negotiations. During this phase, payment terms are negotiated, purchases are monitored for risk, and relationships with suppliers are established and nurtured.
Downstream: In this phase, goods and services are received along with an invoice that is verified and paid. As with the upstream phase, risk management is a crucial component, with stringent checks and balances required to ensure only valid invoices are paid.
Challenges in the AP Process and AP Cycle
Despite its importance, the accounts payable process is not without its challenges. AP teams often struggle with:
- Manual Data Entry: Manual data entry can be time-consuming and prone to errors, leading to inaccuracies and inefficiencies.
- Paperwork: AP is one of the most paper-intensive functions in a company, often leading to misplaced or lost documents.
- Lengthy Approval Processes: Invoices often need to go through several stages of approvals, resulting in delays.
- Lack of Visibility: In the absence of automation, tracking the status of invoices and payments can be challenging.
- Duplicate Payments: Inefficiencies in documentation can lead to duplicate payments, further straining the company’s finances.
12 Actionable steps to Streamline and Improve AP Process
Overcoming these challenges calls for streamlining the accounts payable process. Here are 12 actionable accounts payable process improvement steps to streamline your financial management, and ultimately secure a stronger standing in today’s competitive market.Â
1. Visualize your AP workflow
Before making any accounts payable process improvement, you must first visualize your AP workflow. Why? A visual representation of your workflow helps you get a clear and concise overview of what exactly is happening through your entire AP process.Â
So pull out your markers, whiteboard, and sticky notes, and start mapping it out. Once you do so, you will know precisely where lies the most significant inefficiencies, bottlenecks, and other pain points affecting your organizational performance. While doing this, remember that every bit of detail can be crucial, so make sure your map is detailed and accurate.Â
2. Go paperless
The speed and accuracy of your financial data are critical to accounts payable process improvement. Paper-based receipts constantly coming in late will delay your AP processes significantly. The process will stagger even further when physical invoices get damaged or lost.Â
Our advice to you is to cut paper-based processes entirely. It’s an outdated and messy practice that requires additional resources to go through, sort, and store. Instead, pivot towards electronic invoices that you can easily track and manage.Â
Paperless processes also allow you to make prompt payments from anywhere without skipping a beat. All you need is the bank accounts of your vendors and a handy mobile phone or laptop to log on, review the e-invoice and make the transaction.Â
3. Standardize the workflow
The term workflow culminates from a combination of the word’ work,’ referring to the activities, tasks, and processes your AP requires, and ‘flow’ refers to the path to take to achieve the best outcomes. You need to periodically take the time to standardize your AP workflow to streamline how effectively you meet your business’s growing requirements, making it much harder for accounts payable process improvement. The critical thing to do here is to standardize how you manage your receipts and set a centralized location for their storage.Â
Create standardized AP practices and use an accounts payable aging report to keep tabs on the due dates for each invoice. It ensures you pay on time and maintain strong supplier relationships while giving you the clarity you need to keep your accounts payable process improvement going.Â
Overtly relying on tedious spreadsheets is one such pain point that standardization can fix by creating a template for employees to follow, eliminating disparate data across multiple systems.
4. Drive automation
The main problem that will stand in your way of accounts payable process improvement is manual processes. They are messy, inaccurate, and time-consuming because they involve too many stakeholders in every process. Such systems are prone to suffer from human error. Instead, don’t hesitate and automate. You will instantly cut down the number of people involved with your AP.Â
To go about this, employ one of the many available software that offers AP process automation. But before you finalize one, be sure to inquire about their features, try them out, and check if they address your business’s unique needs.Â
A good suggestion would be to find a low-code accounts payable process improvement software that can fix all your AP pain points without significant investment, technical knowledge, or new infrastructure to deploy. Most importantly, the AP automation software you choose must be able to scale while your business grows and fulfills its true potential.Â
5. Avoid duplicate payments
Duplicate payments are one of the leading results of inefficient invoice processing in accounts payable that causes businesses to suffer from financial losses and damaged supplier relationships.Â
To avoid making multiple payments for the same invoice, you must have 100% real-time visibility into all your invoice activity from a centralized location. A feat that may seem like a challenge if you have legacy AP systems, but rest assured, it is easily achievable through automation.Â
Once you achieve this, you can constantly monitor and track the performance of your invoice management, avoid fraud, set up reminders, speed up payment processing, avoid late payments, and ultimately stop making needless payments.Â
6. Setup payment reminders
In today’s fast past market, you will be constantly bogged with numerous challenges spread across all your core competencies. You may rely heavily upon traditional AP processes to work as they were intended as you need to make the best out of your most valuable resource, your time. This doesn’t always work out well for most business owners, who subsequently suffer from delayed payments and the repercussions that follow them.Â
A simple yet powerful solution to this problem is to set payment reminders based on your supplier’s due dates. It ensures that regardless of how busy it may get for your AP department, they will always be promptly reminded to make their supplier payments and maintain your relationships with them.Â
Regardless of whether you use a simple calendar alert or a more advanced automated option, it is a crucial step to follow. However, an automated option will give you more visibility and features to always keep you on track to pay your dues.Â
7. Archive data
Your data is your most helpful instrument, and the more you have of it, the more successful your plan for accounts payable process improvement will be. To hone it properly, you must collect and safely store it in a readily accessible centralized location.Â
When you archive your valuable AP data, including invoices, receipts, POs, and supplier notices, you ensure they are always readily available for streamlined AP decision-making. These archives will serve you for years as historical information that will help you plan your resources, make timely payments, manage your taxes, enhance compliance, negotiate better deals, and improve your cash flow.Â
So get archiving now.
8. Update contact info
Another simple solution for accounts payable process improvement that is often overlooked by businesses is maintaining updated contact information. Negotiating the best deals and building long-lasting relationships with suppliers requires constant communication. You can only do this if you have a consolidated contact information list of all your suppliers and vendors.Â
You never know what the preferred mode of communication could be for your suppliers and vendors, so to boost your accounts payable process improvement even more, collect the updated contact information for each one, including all communication channels they use.Â
9. Look for discounts
While your business grows, you will constantly need to procure numerous items to achieve your business activities. When you don’t strike the best deals, you will always pay needlessly more than you should for all your sourcing activities, making a significant dent in your accounts payable.Â
You cannot improve your accounts payable if this becomes a regular practice. Instead, empower your accounts payable department and all relevant stakeholders to periodically get on the phone, negotiate better deals, and seek opportunities for discounts where possible. For instance, your teams will identify situations where a particular item is sold at a discounted rate when bought in bulk. But to do this, they must be actively looking for discounts.Â
Remember, there will always be scope to optimize the procurement terms for your supplies, inventory, or services that you need.Â
10. Budget expenses
The best practice to improve your accounts payable process is always to have a clear overview of how much you owe, what your monthly bills look like, and your ability to fulfill these obligations. Your invoices can be an invaluable tool to achieve this understanding.Â
Ensure you use the information from every archived invoice to create realistic budgets and make timely payments without breaking the bank. The late fees you avoid are a bonus to your cash flow and go a long way in boosting your mission for accounts payable process improvement.
11. Create a cash reserve
The famous saying, “the best-laid plans can go awry,” is true for your business. Despite your careful budgeting and streamlining AP processes, sudden expenses and requirements are bound to crop up. During such situations, it is always best to be prepared with a cash reserve to pay for the requirement. It also helps you stay afloat without operational issues during the inevitable months when your cash flow staggers. But always ensure you use your cash reserves for the appropriate situations and practice replacing them when you find yourself out of the problem.Â
12. Maintain supplier relationships
In the end, the success of your accounts payable process improvement plan relies on how well you build lasting relationships with your suppliers. We have touched on building supplier relationships during various instances of this piece because we cannot stress enough how integral it is to your ongoing success.Â
As you grow, your demands will always increase, and it isn’t practical or feasible to approach a new set of suppliers and negotiate rates for every periodical requirement. Such a practice is a waste of your AP department and your business’s time and money.Â
Building strong business connections with trusted suppliers will help you achieve a reliable, feasible, optimized supply chain that will serve you well by helping you strive during good times and weathering the storm during bad times. So start building stronger relationships!
Manage the Accounts Payable Process on Auto-Pilot with Zapro
Simplifying the accounts payable process is easier with the right tools. This is where Zapro comes into play. Zapro is an innovative solution that automates the full cycle accounts payable process, making it a breeze for businesses to manage their payables.
With Zapro, you can automate invoice capture, approval, payment authorization, and payment execution. This not only saves time but also reduces the chances of human error, ensuring a smooth and efficient AP process. Plus, with its digitized system, every vendor invoice becomes an electronic invoice, eliminating the need for paper and making your operations more sustainable.
Streamline the process, improve efficiency, and keep your business running smoothly.