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How to Effectively Improve Your Accounts Payable Process

Are you exhausted dealing with slow, error-prone accounts payable processes that drain your company’s resources and negatively impact your bottom line? As a CFO or CPO, you know the accounts payable process is critical to your organization’s financial operations. Unfortunately, with so many moving parts and stakeholders involved, it can be challenging to streamline and optimize the process.

The consequences of inefficient accounts payable processes can be severe. Late payments, missed discounts, and errors in data entry can lead to strained vendor relationships and damage your company’s reputation. These issues can also create cash flow problems and increase the risk of financial fraud or compliance violations.

In this blog, we will walk you through the steps you need to take to improve your accounts payable process, including identifying inefficiencies, streamlining workflows, and implementing automation. With the right approach, you can transform your accounts payable process into a strategic asset that drives your company’s success.

Understanding the Accounts Payable Process

The accounts payable (AP) process is how companies manage payments to suppliers and vendors for goods and services they purchase.

Effective AP processes ensure that bills are paid on time, avoid late fees and other penalties, and maintain strong relationships with suppliers. The main stages of the AP process include

Purchase order (PO) creation: The AP process typically starts with the creation of a PO, which is a document that outlines the details of a purchase. This includes the products or services being ordered, the quantity, the agreed-upon price, and the delivery date.Receiving: After the vendor delivers the goods or services, the next step is to record the receipt of the products. This is typically done by comparing the received items to the PO and ensuring that everything matches up. If there are discrepancies, the AP team may need to resolve them with the vendor.Invoice receipt: Once the products or services are received and recorded, the vendor will send an invoice to the business. This invoice typically includes the same information as the PO, as well as the vendor’s payment terms and instructions for payment.Invoice verification: The AP team will need to verify that the invoice matches the PO and the receipt of the products. This may involve checking the pricing, quantity, and other details to ensure that there are no discrepancies.Approval: Once the invoice is verified, it needs to be approved for payment. Depending on the business’s internal policies and procedures, this may involve getting approval from a supervisor, manager, or other stakeholder.Payment: After the invoice is approved, the AP team will initiate payment to the vendor. This may involve sending a check, initiating an electronic funds transfer, or using another payment method. The payment will typically be made within the vendor’s payment terms, which may vary depending on the vendor and the nature of the purchase.Reconciliation: Finally, the AP team will reconcile the payment with the invoice and the vendor’s account. This involves ensuring that the payment was processed correctly, that it matches the amount owed, and that the vendor’s account balance is updated accordingly.

In addition to these main stages, there may be other steps involved in the AP process depending on the business’s specific needs and requirements. For example, some businesses may have additional approval processes or require special handling for certain types of purchases. However, the basic stages outlined above are the key components of the AP process that every business needs to follow to effectively manage their outstanding debts to vendors and suppliers.

Understanding AP processes is essential for any organization that wants to optimize its financial operations, reduce costs, and maintain healthy vendor relationships. It involves understanding the various steps involved in the AP process, identifying potential bottlenecks, and implementing best practices to streamline and automate the process.Â

By taking a proactive approach to AP management, companies can ensure that their financial operations run smoothly and efficiently.

10 Ways to Improve Accounts Payable Process Efficiency

Now that you know how nuanced your AP processes are, here are 10 ways you can revamp the way your accounts payable department works:

Set a standardized accounts payable process

Creating a standardized accounts payable process is essential to ensure consistency and reduce the risk of errors. Start by mapping out your current accounts payable process and identifying areas for improvement. Then, develop a standardized process with clear guidelines for invoice processing, approval workflows, and payment scheduling.

You can create an invoice processing checklist that outlines the required information, such as invoice number, vendor name, and purchase order number. This will help ensure that all invoices are processed consistently and accurately.

Set up an approval workflow

Implementing an approval workflow ensures that all invoices are reviewed and approved by the appropriate personnel before payment is made. This helps reduce the risk of errors and fraud while ensuring all invoices are properly authorized.

You can set up a multi-level approval workflow that includes the appropriate department head, finance team member, and executive to ensure that all invoices are reviewed and approved by the right team member.Â

Use an AI-powered solution

Using technology can help streamline accounts payable processes, reduce manual errors, and increase efficiency. Consider implementing an accounts payable automation software or using electronic invoicing.

Develop a vendor management strategy

Devising a vendor management strategy ensures that you are working with the right vendors and that vendor relationships are well-managed. Include regular vendor reviews, vendor performance metrics, and vendor selection criteria to reduce the risk of errors, increase efficiency, and improve vendor satisfaction.

Implement a purchase order process

Implementing a purchase order process helps ensure that all purchases are properly authorized, reducing the risk of errors and fraud. It also helps ensure that all invoices are correctly matched to purchase orders.

Example: Implement a purchase order process that requires all purchases to be approved by the appropriate personnel and tracked through a centralized system. This will help ensure that all purchases are properly authorized and tracked.

Monitor accounts payable metrics

Monitoring accounts payable metrics can help identify areas for improvement and measure the success of your accounts payable process. Key metrics to monitor include invoice processing time, payment accuracy, and vendor satisfaction.

Example: Set up a dashboard that tracks key accounts payable metrics, including invoice processing time, payment accuracy, and vendor satisfaction. Use this dashboard to identify areas for improvement and track progress over time.

Implement a three-way match

Implementing a three-way match process can help reduce the risk of errors and fraud by ensuring that all invoices are correctly matched to purchase orders and receiving documents. This will help reduce the risk of errors and fraud.

Establish Clear AP Policies

Establishing clear AP policies can help ensure that everyone in the company follows the same procedures for managing vendor invoices and payments. This can reduce the risk of errors and increase efficiency. Your company could draft a set of policies requiring all invoices to be approved by a designated manager before payment.

Conduct Regular AP Audits

Regular AP audits can help identify inefficiencies, errors, and potential fraud. These audits should include a review of invoices, purchase orders, and payment records. Your company could conduct a quarterly audit of its AP processes to identify any discrepancies or areas for improvement.

Regularly Review AP Processes

Regularly reviewing AP processes can help identify inefficiencies and areas for improvement. This can help ensure the AP process is optimized and aligned with the company’s goals. For instance, your company could conduct a bi-annual review of its AP processes to identify any bottlenecks or areas where automation could be implemented.

5 Benefits of Improving Accounts Payable Process

Improving your accounts payable (AP) processes can have several benefits for your organization, including

Reduced Costs

Implementing best practices to streamline and automate AP processes can reduce processing time and minimize errors, ultimately leading to lower processing costs. Additionally, by negotiating favorable payment terms with vendors and paying invoices on time, companies can avoid late fees and penalties.

Improved Cash Management

Optimizing AP processes can help companies manage their cash flow better. By having accurate and up-to-date information on vendor invoices, companies can better plan their cash outflows and avoid cash shortages. Additionally, by negotiating favorable payment terms with vendors, companies can extend their payment cycles and maintain healthy cash balances.

Increased Efficiency

Streamlining AP processes can improve efficiency, reduce errors, and free up staff time for more strategic tasks. Automation can help eliminate manual data entry and reduce processing time, ultimately leading to a more efficient and streamlined process.

Better Vendor Relationships

By paying invoices on time, maintaining accurate records, and communicating effectively with vendors, companies can build stronger and more positive relationships with their vendors. This can lead to improved supplier performance, better pricing, and access to new products and services.

Improved Compliance

25% of accounts payable leaders say they are struggling to mitigate increased fraud and compliance risks. Implementing clear policies and procedures around AP management can help companies stay compliant with regulatory requirements and avoid legal and financial penalties. By conducting regular audits and maintaining accurate records, companies can demonstrate their commitment to compliance and avoid costly fines and legal action.

How to Fastrack Your Accounts Payable Process Improvement

If you’re looking to fast-track your accounts payable (AP) process improvement, here are some actionable steps you can take:

Conduct a Process Analysis

Start by analyzing your current AP process to identify bottlenecks, inefficiencies, and areas for improvement. Consider mapping out the entire process, from invoice receipt to payment, to identify pain points and areas where automation or process changes could make a significant impact.

Use an AP Automation Tool

Consider adopting technology solutions like AP automation software to streamline and automate your AP processes. Automation can help you in the following ways:

  • Eliminate manual data entry
  • Enable online approvals
  • Generate digital audit trails
  • Match invoices to POs and payments
  • Enable secure, end-to-end payments
  • Reduce errors such as duplicate payments

Establish Clear Policies and Procedures

Clear policies and procedures can help standardize your AP processes and ensure consistency across the organization. Consider documenting your policies and procedures, communicating them effectively to staff, and conducting regular training to ensure compliance.

Set and Track Specific KPIs

Establishing performance metrics can help you track progress and identify areas for further improvement. Here are a few metrics you can use to gauge your AP process:

  • Average Time Per Invoice Processed
  • Cost Per Invoice Processed
  • Number of Invoices Processed / Employee / Day
  • Percent of Invoice Exceptions
  • Days Payable Outstanding (DPO)
  • Average Time to Approve an Invoice
  • Invoices Processed Per Year
  • Percentage of Supplier Discounts Captured
  • Percentage Of Late Payments
  • Payment Errors
  • Total Invoice Cycle Time
  • AP Expense as a Percentage of Revenue

Consider establishing a dashboard or scorecard to track metrics and communicate progress to stakeholders.

Foster Collaboration

Collaboration between departments, such as procurement, accounts payable, and finance, can help streamline processes and improve communication. Consider establishing regular meetings to discuss process improvement initiatives and identify opportunities for collaboration.

By taking these steps, you can fast-track your AP process improvement and achieve tangible results in a short amount of time. Don’t be afraid to experiment with new approaches and technologies, and be sure to regularly review and adjust your processes to stay ahead of the curve.

Improving Accounts Payable Through Automation

41% of C-level accounting executives said the adoption of cloud computing would have the biggest impact in the next three to ten years. When your company automates its Accounts Payables operations, you unlock the ability to closely track your KPIs while using your metrics to bring forth change within your overall organization. You can also limit errors and decrease supplier inquiries through AP Automation by using a single dashboard.Â

When it comes to measuring AP performance, automation allows for the centralized data collection of all your payment data. The more you automate, the more data the system collects. Then advanced and predictive analytics gives you a full view of your organization’s entire spend profile, meaning you get total insight, oversight, and hindsight into your AP operations.

The recent wave of the pandemic and the subsequent recession have challenged AP teams to think more strategically, which led them to leverage AP automation to help improve processes. Thanks to automation, AP teams can seamlessly manage cash forecasting, financial planning, budget analysis, risk management and compliance, and supplier relationship/supply chain management. These added insights and visibility are crucial to organizations during a recession by maximizing efficiencies.