In the accounting world, Accounts Payable (or AP) is essentially the process of paying bills and understanding how much you owe to each vendor. However, there are a lot of moving parts to this process, including collecting and processing bills from your vendors; reviewing and approving those bills; entering them into your accounting software and paying them.
So – what does this process look like, what are the inefficiencies, and what can be done to make it more efficient?
In a large business, the AP department can get incredibly complex – and for good reason. There is a lot that can go wrong from late payments to fraud to paying unauthorized bills. For many small businesses, the system is inefficient, unstructured, and risky. Often much of the heavy lifting falls on the shoulders of the business owner, sucking away a tremendous amount of time.
A good AP process should have most, if not all of the below best practices:
- Use of technology that allows an audit trail and automated payment release.
- Limited Access and internal controls. (Never have one person handle the whole process of receiving, entering, approving, and paying)
- Bills are entered with all information such as due dates, invoice numbers, account numbers, and attached copies of the bill.
- Payments are prioritized by due dates.
- Quality controls and duplicate payment reviews. (This also includes a review and approval process for accurate expense coding)
- Timely and regular reporting that includes cash flow and pertinent AP details.
Your company’s accounts payable (AP) team will process any invoice that is sent on behalf of your company. Then your AP team, manually or mechanically, checks each invoice, then will ensure the funds are available and make sure the invoice was approved by an approved approver. When it comes to AP, companies have a lot of options. They can choose to process invoices manually or mechanically. Manual processing is done by hand, while mechanical processing is done with the help of software.
Here is a snapshot of the manual AP process:
In summary, it is important to have an AP process that is automated and streamlined. From reviewing and approving invoices to the final payment, having a process not only helps to make sure that payments are not missed but, the time it takes to process payments can be reduced significantly. This is especially important for small businesses and startups that do not have the resources to hire an AP clerk or an AP manager.
There are 3 main inefficiencies in the AP world:
- Too much paper – From paper invoices to paper checks, the reliance on hard copies slows down the process of documentation—the lifeblood of any accounting system. Manual paper check writing and physical signatures should be a thing of the past.
- Overly complex workflow – Sometimes processes grow and become overly complex as a business grows. A good process should be as simple as possible and allow for the fewest “touches” as possible. We want the right people involved so that we can get fast and efficient approvals and categorization feedback. Finally, we want the act of issuing payment to be semi-automated, electronic, fast, and secure.
- Timing of payments and cash flow – Keeping track of payment terms across dozens, hundreds, or even thousands of vendors is a significant challenge. But paying those bills too early can funnel away cash you need, and paying them too late can invoke extra charges that really add up. Who you pay and when you pay shouldn’t be complicated and should be something you can do on the first look at the bill.
- Create electronic records – This speeds up your ability to store and retrieve information quickly. It also allows for a system to request approval and make historical information searchable with a few keystrokes. This digitalization allows for controls to be in place around who can access records, and help with audits (at any level) should that situation arrive. Not to mention, there is a cost-saving through a reduced need for paper, toner ink, staples, folders, and postage.
- A process for timing payments – Who you pay and when you pay them can become an important part of the growth of your business. Timing these payments to make sure that you are paying invoices in a timely manner but not at the detriment of your cash flow can be an important detail to a company’s sustainability. Software has the ability to navigate these terms. In particular, it can track those terms and attach this information to each invoice, providing real-time status on due dates, approval cycles, and projected spending, for powerful data insights that often lead to better decision-making.
- Simple, yet accurate real-time data – Accountix gives you a quick snapshot of where you stand from a cash flow perspective. Having visibility in one place prevents you, as the decision maker, from needing to spend the time to track down this information in multiple sources, with multiple accounts, and multiple logins. It is a simple yet valuable tool to understand the AP obligations your company has at that time, and allows your business to make informed payment decisions more soundly.
Having a simple and effective Accounts Payable system and workflow can save countless hours and hassle from every business owner’s life. Not to mention the cost savings associated with reduced time spent by your whole team.
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