For any modern business, accounts payable is one of the highest-stakes tasks there is. After all, every business needs to pay what it owes - you can’t afford to get this wrong.
Managing invoices promptly and accurately is key to maintaining good relationships with suppliers. A good accounts payable system also ensures you don’t have liabilities on your books for too long, avoiding the risk to business confidence.
If any of this has you feeling stressed out, don’t worry - we’re here to help!
In this post, we’ll take a look at the basics when it comes to accounts payable, as well as exploring some critical tools and techniques.
But first, let’s start with the fundamentals - what is accounts payable, exactly?
What is accounts payable?
Put simply, accounts payable consists of everything your business owes to creditors. This can run the full spectrum of debts, from freelancers billing by the month through to car leasing agencies invoicing for your work fleet.
Usually, accounts payable refers to short-term debts, i.e. things you plan to pay off within the year - ideally well within the year.
Long-term debts - such as mortgages and other loans taking more than twelve months to pay off - are typically itemized as separate liabilities, and aren’t included in accounts payable.
Accounts payable is a liability for businesses. This makes it very important to manage effectively and responsibly, as doing so helps maintain confidence in your ability to pay your debts. Plus, it’s a respectful thing to do for your creditors.
Let’s take a second to cover a key distinction: accounts payable vs. accounts receivable.
Accounts payable vs. accounts receivable
It’s helpful to think of accounts payable and accounts receivable as two sides of the same coin.
Accounts payable refers to the processing of payments owed to debtors by your business.
Accounts receivable, however, refers to the exact opposite - money owed to your business by debtors, i.e. people who haven’t yet paid for your goods or services.
With us so far? Excellent.
Now we’ve got the definition stuff out of the way, let’s crack into some of the crucial considerations when managing accounts payable.
Managing the accounts payable process
In the modern world, businesses have to pay a lot of creditors on a constant basis.
This includes software providers, professional services such as accountants or HR advisors, and any freelancers you might have on the books.
The number of people relying on the prompt and accurate payment of invoices makes accounts payable a high-stakes task. If you don’t have a system in place to help you manage these payments, you’re asking for trouble.
The most important thing: accuracy
When it comes to accounts payable, the most important thing is to pay only company invoices that are legitimate and accurate.
This might sound obvious, but it’s crucial. Before you process a vendor's invoice for payment, remember to check the following:
- Does the invoice reflect exactly what the company ordered?
- Has the company actually received the goods or services billed?
- Are the unit costs and calculations correct? What about tax?
Getting these details right will help ensure the accuracy and integrity of your accounts payable process.
Let’s break this down into a few key steps.
Key steps in the AP process flow
For most businesses, the accounts payable process boils down to three key steps:
- Completing a purchase order: This involves setting out the items or services to be purchased, as well as the price. A purchase order also lists any terms and conditions for the transaction, and the timelines for delivery.
- Processing a receiving report: Here, the supplier records the goods or services provided and lists the payment owed to the supplier. Receiving reports list a lot of crucial details, so it’s important to take the time to comb through them.
- Receiving and processing the supplier invoice: Once an invoice is received, the business then processes it for payment. As above, this involves checking through each of the details to ensure it matches the goods or services actually received.
Simple, right? Well, not necessarily.
Unfortunately, accounts payable is one of the areas most prone to business fraud. The sheer amount of money exiting a business through accounts payable makes it an attractive process for fraudsters to target.
And then there's always the risk of simple mistakes along the way. Even if everyone involved means well, small errors can creep in and be costly down the line.
Because of this, it’s crucial to break up responsibility for the separate steps. Having multiple people sign off on invoices makes it a lot harder to game the system.
(Be sure to read our post on the four biggest fraud risks finance teams face, and what you can do to guard against them.)
Another important step in your AP process flow? Using a centralized payment system.
Centralise your invoice payments
When processing supplier invoices, it’s crucial to centralise payments. If all company payments come from a single account, it’s a lot easier to get a clear overview of the money heading out the door.
One thing you really want to avoid is paying invoices on an ad hoc basis, or with multiple accounts or credit cards.
Splitting your invoice payments not only makes it harder to get a handle on how much your company is paying each month, but also opens you to the risk of fraud.
But more on this shortly. For now, let’s take a closer look at how you can track due payments.
Track every due payment clearly
For the purposes of cash flow, budgeting and decision making, it’s important to know exactly what you owe, who it’s owed to, and when payment is due.
For a lot of regular, recurring payments (for example, fruit deliveries for the office kitchen or website hosting fees), setting up a recurring payment might be more convenient.
Recurring payments can remove the stress and distraction of managing repeating payments. However, you should balance this with the need to have visibility across your payments - you don’t want to risk paying for things you no longer need.
Know exactly who authorizes payments
A lot of mistakes occur because people aren’t sure of a critical detail - who signs off on the payment of supplier invoices, exactly?
For every client invoice that arrives, you need to know who is in charge of authorizing payment.
Is it the relevant manager? Is it the CFO? Heck, is it the CEO?
The answer to this question will depend on company structure and the level of autonomy in managing payments.
In the event of spending irregularities, knowing exactly who signed off on a particular payment is crucial to getting to the bottom of things.
Not only that, but having clear responsibility also reduces the risk of invoices falling between the cracks and going unpaid.
Accounts payable tips from around the web
There's lots of excellent advice out there to help improve your AP process. Here are a few of our favorite strategies.
MineralTree - Capture invoices in small doses
MineralTree are AP and payment automation experts. And for invoices especially, they recommend keeping batch sizes manageable.
"The more time you spend performing manual data entry, the more prone to mistakes you become over time. As vendor invoices trickle in, it's tempting to put off the process of capturing them to a future point in time that you can knock them all out in fell swoop.
"Capturing your invoices in smaller doses, or even individually, will limit errors and the amount of time you spend correcting mistakes."
This is why we advocate empowering individual team members to input invoice data as soon as they receive it. So no one person has to wade through a mountain of invoices.
Dooap - Pay invoices in larger batches
This may sound counter to the advice above, but we're actually talking about two different parts of the process. Log invoices in your AP or spend management system in small doses, yes. But that doesn't mean you need to pay each one immediately.
"If you are currently paying purchase invoices five times a week, you use work time – five times a week – logging into the software, forming the payment batches, checking, approving and sending payments. If you were to send payments only twice a week, the workload is immediately reduced by 60%, but your vendors will still get paid on time and never notice the difference.
"Why not reduce the payment times right away?"
Once invoices have been input and checked, there's not much data entry and therefore few errors to make. So it makes sense that you can tackle payments in larger batches.
Invoicera - Set up task reminders
You can't fight human nature and expect to win. It may feel like you can stay on top of all invoices and payments without help, but eventually something's got to give.
Plus, you have a whole team to think about.
"Forgetting information and tasks is a very common human tendency. By setting up reminders one can easily take care of bills and take steps towards accounts payable process improvement."
Something as simple as an email or Slack reminder helps you and your team stay ahead. We have these in Spendesk, and whatever spend management tool you use should too.
Due - Maintain good vendor relationships
If you use the same suppliers over and over again, you need to be able to rely on them to have your best interests at heart. Thus, you need to prioritize their best interests yourself:
"Cultivating relationships with your vendors may pay off over time as well for your accounts payable. For example, if you are on good terms with a vendor as a regular customer, you may be able to get discounted services or products.
"Additionally, if your company prides itself on timely payments, you may be able to secure discounted payment terms (like 2% at ten days after invoice)."
It's pretty simple - you scratch their back, and they'll scratch yours.
Track and process invoices with a good spend management tool
Getting accounts payable right can be time-consuming. After all, there’s a head-spinning amount of detail to stay on top of.
Unfortunately, a lot of businesses aren’t helping themselves. Even in the software age, many businesses still use ad hoc processes. Some Luddites out there are even still using physical, hard-copy invoice approval systems.
Not only is this time consuming and expensive, but it also creates the risk of user error. With the amount of money at risk in accounts payable, it’s important to get this right from the first step.
The right tools can make all the difference here, helping you track and process invoices clearly and accurately, and all with minimal stress.
With an integrated spend management platform, you can automate each step in the accounts payable process, from invoice collection through to processing payment.
For example, Spendesk’s Supplier Invoices module helps you keep track of the dozens of invoices that come your way on a daily basis. Spendesk automatically sorts invoices into categories for approval, and sends reminders when due dates are approaching.
Relying on dedicated software to help manage your accounts payable will keep your business partners happy, and will stop you from becoming “that client” with suppliers.
Conclusion: Accounts payable is too important to get wrong
Trust us: accounts payable is one of the most important tasks to get right.
The risks are simply too great to leave to chance. A poor accounts payable process can not only damage your relationships with suppliers, but can open you to the risk of fraud.
To give yourself the best shot at a seamless and responsive accounts payable process, think about the tips in this post, and reflect on how you could improve your systems.
While you’re at it, take a look at Spendesk’s handy accounts payable features. They’ll save you and your team a lot of time and stress.