What is the accounts payable process?
From purchase orders to proof of payments — AP processes are consistently document-heavy. Here's what a digitized, agile AP structure should look like.
Accounts payable (AP) is an essential business function that affects profitability and operations throughout your organization. On a fundamental level, it is the total amount owed by your organization to suppliers and vendors for goods and services purchased. This amount shows up as a liability on the balance sheet and impacts the health of your organization’s cash flow.
An overview of the Accounts Payable process
The accounts payable (AP) process is responsible for paying suppliers and vendors for goods and services purchased by the company. AP departments typically handle incoming bills and invoices but may serve additional functions depending on the size and nature of the business.
The AP process can be broken down into four steps, although the complexity and length of each may differ from company to company. The steps are:
- Receiving the invoice
- Reviewing the invoice
- Approving the invoice
- Paying suppliers or vendors
Why is accounts payable management important?
AP is a critical business process despite falling under the category of back office functions. The efficiency and productivity of an AP department are dependent on how its employees can manage the procure-to-pay cycle in a timely manner.
A well-managed AP department ensures:
- Strong relationship with suppliers and vendors that benefits the business in the long run
- Uninterrupted delivery of goods and services purchased that keeps the business running smoothly
- No overdue payments, which may incur penalties or extra costs
- Systematic tracking of all invoices and payments made to avoid missing or duplicate payments
- Better management of company’s cash flow
- Reduced risk of fraud
What are the challenges faced by accounts payable?
However, AP departments face challenges that prevent them from optimizing their processes. AP managers are also under pressure to do more with less while transforming their departments from cost centers to profit centers.
The problems commonly faced by AP professionals include:
- Too much paperwork. AP is one of the most paper-intense departments with half of all invoices received as paper documents. Sorting, organizing and processing paper files steal time from your employees that could be spent on higher value tasks.
- Manual data entry. AP teams spend a lot of time manually keying in data from multiple sources and formats, which could cause data entry errors and misplaced documents.
- Lengthy approval process. Depending on the payment amount, there may be several stages and levels of approval. Most invoices also require approval from stakeholders outside of the AP department. This could increase the cycle time especially if approvers cannot easily access approval workflows.
- Lack of visibility. Paper and manual processes create a blind spot that prevents AP teams to efficiently track the company’s cash flow. Not knowing what stage each invoice is in increases the risk of late payments and makes it difficult to analyze the company’s financial health.
How to streamline the accounts payable process
To tackle the issues that prevent AP teams from being efficient, there are a set of best practices that help streamline the accounts payable process from start to end.
- Centralize all critical AP documents and automate processes on a single platform. This makes end-to-end AP automation possible with the ability to capture, integrate, measure, process, store and access critical AP information.
- Reduce paper-based processes. Set up guidelines for vendors to submit digital invoices and leverage invoice capture software to automatically extract the information required into your ERP.
- Set up payment reminders. This ensures you get notifications to avoid late or missed payments and take advantage of early payment discounts.
- Generate monthly reports. Compile monthly reconciliation, voucher activity and payment history reports to help your company understand their cash flow and prepare for audits and information requests.