Everything you need to know about AP process

As a business owner or financial professional, you know that managing your company's finances is crucial for success. One of the most important aspects of financial management is the accounts payable (AP) process, which involves handling invoices and making payments to vendors and suppliers.

Having a well-defined and streamlined AP process is essential for maintaining good relationships with your vendors, ensuring timely payments, and keeping your financial records accurate and up-to-date.

In this comprehensive guide, we'll dive into the world of accounts payable, exploring what it is, why it's important, and how you can optimize your AP process for maximum efficiency and cost savings.

What is an AP Process?

The accounts payable process is the series of steps involved in receiving, verifying, and paying invoices from vendors and suppliers. It begins when your company receives an invoice and ends when payment is made and recorded in your financial records.

A well-managed AP process is critical for the financial health and operational efficiency of any business. It helps prevent late payments, avoids duplicate or incorrect payments, and ensures that your company's cash flow is optimized.

Importance of Creating an AP Process

A well-defined AP process ensures timely payments, accurate records, prevents fraud, saves costs, improves cash flow, enables better decisions, strengthens vendor relationships, increases efficiency, supports growth, and manages risks.

Creating a standardized AP process is crucial for several reasons:

1. Ensures timely payments: 

A well-defined AP process ensures that invoices are paid on time, helping you avoid late fees and maintain good relationships with your vendors. Late payments can strain vendor relationships and even result in service disruptions or supply chain issues.

2. Accurate financial records: 

With a consistent process for handling invoices, you can ensure that your financial records are accurate and up-to-date, making it easier to track expenses and prepare financial statements. This is particularly important for compliance with tax regulations and financial reporting requirements.

3. Prevents Fraud: 

A standardized AP process with proper controls and approvals can help prevent fraudulent activities, such as duplicate payments or payments to fictitious vendors. This is crucial for protecting your company's financial assets and reputation.

4. Increased cost savings:

An efficient AP process can help you take advantage of early payment discounts, avoid late fees, and reduce manual effort and errors, leading to significant cost savings over time. By automating parts of the process and streamlining workflows, you can reduce the time and resources required to manage accounts payable.

Stages of the Accounts Payable Process

The AP process includes receiving invoices, verifying them, getting approvals, entering data, processing payments, recording payments, and managing vendor relationships.

The accounts payable process typically involves the following steps:

1. Invoice receipt: 

Invoices are received from vendors via mail, email, or electronic data interchange (EDI). It's important to have a designated channel or system for receiving invoices to ensure that they are not lost or overlooked.

2. Invoice verification: 

Invoices are reviewed for accuracy, ensuring that the goods or services were received as ordered and that the pricing and terms are correct. This step may involve matching the invoice to a purchase order or delivery receipt to validate the transaction.

3. Invoice approval: 

Invoices are routed for approval by the appropriate department or individual, based on your company's approval hierarchy and policies. This ensures that only authorized and budgeted expenses are approved for payment.

4. Invoice data entry: 

Approved invoices are entered into your accounting system, either manually or through an automated data capture process. This step records the invoice details, such as vendor information, invoice amount, and due date, in your financial records.

5. Payment processing: 

Payments are initiated based on the invoice due dates and your company's payment cycle, using methods such as checks, ACH transfers, or wire transfers. This step involves selecting the appropriate payment method, verifying payment details, and executing the payment.

6. Payment recording: 

Payments are recorded in your accounting system, and the corresponding invoices are marked as paid. This step updates your financial records and helps you track your company's expenses and cash flow.

7. Vendor management: 

Vendor records are updated with payment information, and any issues or discrepancies are resolved through communication with the vendor. This step helps maintain accurate vendor information and strengthens vendor relationships.

How to Streamline Your Accounts Payable Process

To improve your AP process, automate invoice handling, use electronic approvals, centralize AP tasks, take advantage of early payment discounts, track key metrics, let vendors submit invoices electronically, and connect AP with other financial systems.

Here’s a detailed breakdown:

1. Automate invoice processing:

Implement an automated data capture solution to reduce manual data entry and errors. This can involve using optical character recognition (OCR) technology to extract invoice data automatically and route it for approval and processing.

OCR technology can read and extract data from scanned or electronic invoices, eliminating the need for manual data entry. This not only saves time but also reduces the risk of errors that can occur during manual input. Automated data capture solutions can also validate extracted data against your company's business rules and flag any discrepancies for review.

Once the invoice data is captured, it can be automatically routed to the appropriate approvers based on predefined business rules and approval hierarchies. This streamlines the approval process and ensures that invoices are processed in a timely manner.

2. Implement electronic approvals:

Use an electronic approval workflow to streamline the invoice approval process and ensure timely processing. This allows approvers to review and approve invoices remotely and on-the-go, reducing approval bottlenecks and delays.

Electronic approval workflows can be customized based on your company's specific requirements and approval hierarchies. Approvers can receive notifications when an invoice is pending their review and can access the invoice details electronically from anywhere, at any time.

Electronic approvals also provide a clear audit trail of who approved each invoice and when, which can be useful for compliance and dispute resolution purposes. Additionally, electronic approvals can be integrated with your company's accounting system to automatically update the status of invoices and trigger payment processing once all required approvals are obtained.

3. Centralize AP operations:

Consider centralizing your AP function to improve control, standardization, and efficiency. This involves consolidating AP tasks and personnel into a single department or shared service center, which can help streamline processes, reduce duplication of effort, and enhance visibility into AP performance.

Centralizing AP operations can provide several benefits, including:

- Standardization of processes and procedures across the organization

- Improved control and visibility over invoice processing and payment activities

- Reduced duplication of effort and increased efficiency through specialization and economies of scale

- Enhanced ability to monitor and measure AP performance and identify areas for improvement

When centralizing AP operations, it's important to clearly define roles and responsibilities, establish service level agreements (SLAs) with internal customers, and implement robust communication and collaboration channels to ensure smooth operations.

4. Leverage early payment discounts:

Take advantage of early payment discounts offered by vendors to reduce overall costs. By paying invoices early, you can save a percentage of the invoice amount, which can add up to significant savings over time.

Many vendors offer early payment discounts, such as 2/10 net 30, which means that if you pay the invoice within 10 days, you can deduct 2% from the total amount due. To leverage these discounts, you need to have a clear understanding of your company's cash flow and payment priorities.

Implementing an AP automation solution can help you identify invoices that are eligible for early payment discounts and prioritize them for processing. You can also negotiate with vendors to extend early payment discount terms or explore supply chain financing options to fund early payments.

5. Monitor key performance indicators (KPIs):

Track and monitor KPIs such as invoice processing time, payment accuracy, and vendor satisfaction to identify areas for improvement. This can help you measure the effectiveness of your AP process and make data-driven decisions for optimization.

Some key AP KPIs to track include:

- Invoice processing cycle time: The average time it takes to process an invoice from receipt to payment

- First-pass yield: The percentage of invoices that are processed without errors or exceptions on the first attempt

- Payment accuracy: The percentage of payments made accurately and on time

- Vendor satisfaction: The level of satisfaction among your vendors with your company's payment practices and communication

- Cost per invoice: The average cost of processing an invoice, including labor, technology, and overhead costs

This can help you prioritize optimization efforts and measure the impact of process changes over time.

6. Implement vendor self-service portals:

Provide vendors with access to a self-service portal where they can submit invoices electronically, check payment status, and update their information. This can reduce the workload on your AP team and improve vendor communication and satisfaction.

A vendor self-service portal can provide several benefits, including:

- Reduced manual effort and paper-based processes for invoice submission and vendor communication

- Improved visibility and transparency for vendors into the status of their invoices and payments

- Faster resolution of vendor inquiries and disputes through self-service capabilities

- Enhanced data accuracy and completeness through vendor-maintained information

You should also establish policies and procedures for vendor onboarding, data validation, and issue resolution to ensure smooth operations.

7. Integrate with other financial systems:

Integrate your AP process with other financial systems, such as your enterprise resource planning (ERP) or accounting software, to enable seamless data flow and reduce manual data entry and errors.

Integration between your AP process and other financial systems can provide several benefits, including:

- Reduced manual data entry and errors through automated data transfer and validation

- Improved data accuracy and consistency across systems

- Enhanced visibility and reporting capabilities through centralized data storage and analysis

- Faster processing times and reduced cycle times through automated workflows and approvals

When integrating your AP process with other financial systems, it's important to map out the data flows and business processes across systems and ensure that data is being transferred accurately and securely. 

Challenges in the Accounts Payable Process

Some common challenges in AP are manual work, limited visibility, fraud risks, managing vendors, following regulations, integrating technology, and getting people to adopt changes.

1. Manual processes: 

Manual data entry and paper-based processes can be time-consuming, error-prone, and difficult to scale. These processes often involve multiple touchpoints and handoffs, which can lead to delays, lost invoices, and inaccurate data.

2. Lack of visibility: 

Without a centralized system, it can be challenging to gain visibility into the status of invoices and payments across the organization. This can make it difficult to track AP performance, identify bottlenecks, and make informed decisions for process improvement.

4. Vendor management: 

Managing vendor relationships and resolving issues can be time-consuming and complex, particularly with a large vendor base. This can involve managing vendor information, communicating payment status, and resolving disputes or discrepancies.

5. Compliance and regulations: 

Ensuring compliance with tax regulations, financial reporting requirements, and industry-specific standards can be challenging, particularly for companies with complex AP processes or international operations.

‍

Frequently Asked Questions (FAQs)

1. What is the difference between accounts payable and accounts receivable?

Accounts payable refers to the money your company owes to vendors and suppliers, while accounts receivable refers to the money your customers owe to your company. Accounts payable represents a liability on your company's balance sheet, while accounts receivable represents an asset.

2. How can I ensure that invoices are paid on time?

To ensure timely payments, implement a standardized AP process with clear timelines and responsibilities, leverage automation to reduce manual effort, and monitor payment due dates closely. You can also set up reminders or alerts for upcoming due dates and prioritize payments based on vendor terms and your company's cash flow needs.

3. What is the AP workflow process?

The AP workflow process is a structured sequence of steps for managing and paying vendor invoices. It typically includes invoice receipt, data capture, matching, approval, payment authorization, payment execution, and record-keeping, all designed to ensure accurate and timely payments while maintaining financial control.

4. How can I reduce the risk of fraud in my accounts payable process?

To reduce fraud risk, implement strong controls and approvals, segregate duties, conduct regular audits, and provide training to your AP staff on identifying and reporting suspicious activities. You can also use technology solutions, such as duplicate payment detection or vendor verification, to prevent and detect fraudulent activities.

‍

Here's how Spendflo can help you streamline your AP process with Procure-to-pay feature

At Spendflo, we understand the importance of having a streamlined and efficient procure-to-pay process. Our comprehensive P2P solution is designed to help businesses like yours optimize your procurement workflow, reduce manual effort, and improve financial control.

Consolidate all your procurement activities in one user-friendly platform, making it easier to manage suppliers, catalogs, and purchase orders.

• Streamline your requisition and approval process with customizable workflows, ensuring compliance and reducing cycle times.
• Easily manage and update supplier catalogs, ensuring accurate pricing and product information for streamlined purchasing.
• Store, manage, and track contracts within the platform, ensuring compliance and leveraging negotiated terms and discounts.
• Gain real-time visibility into your procurement spend with customizable dashboards and reports, enabling data-driven decision-making and cost optimization.

Ready to take your accounts payable process to the next level? Contact us today to schedule a demo and see how Spendflo can help.

‍