In this blog post, we'll delve into the fundamentals of accounts payable, explore its benefits, share best practices for implementation, and highlight how automation can revolutionize your AP workflow.

What is accounts payable?

Accounts payable (AP) is an accounting term used to explain the money owed to the suppliers for goods purchased on credit. When a business buys the necessary goods or services on credit, payment is made later but is usually due in 30 - 60 days, which may be even longer in some cases. 

The business must negotiate favorable payment terms, which can significantly impact cash flow. The company will provide a purchase order to the supplier, and after that supplier will send the goods with an invoice requesting the payment by a particular date. Late fees will appear when the amount owed isn't paid within that timeframe.

Accounts Payable Vs Accounts Receivable - What is the Difference?

Accounts payable and accounts receivable are two distinct but interconnected sides of the same financial transaction. Accounts payable is the money a company owes to its suppliers, while accounts receivable is the money owed to the company by its customers. Understanding this difference is crucial for a comprehensive grasp of financial management.

On a company's balance sheet, accounts receivable are current assets expected to convert to cash within a year (or longer if extended credit terms are offered). Accounts payable are current liabilities representing the company's short-term and outstanding debts to its creditors.

While accounts receivable and accounts payable may seem similar due to their recording methods in the general ledger, it's crucial to distinguish them on a company's balance sheet.

One represents assets (money owed to the company) and the other liabilities (money the company owes). Refusing the two can lead to accurate financial reporting, affect working capital, and potentially lead to bad debt, with other consequences.

Accounts Payable Examples

Here are a few examples of accounts payable and the process:

Example 1: Let's take an example of a construction company ordering materials from a supplier. The supplier delivers the raw materials but offers 60-day payment terms. The outstanding invoice amount becomes the construction company's accounts payable. It's a debt the company owes to the supplier, similar to a tab. Until the company pays for the materials, this amount is recorded as a short-term liability on its financial statements, representing a short-term debt owed to the supplier.

Example 2: Suppose Company A buys machinery from Company B on credit, agreeing to pay within 45 days. Company A records this as a credit purchase, listing Company B as a creditor with an accounts payable balance. Conversely, Company B records the sale as an accounts receivable.

Fifteen days before the payment is due, Company B sends an invoice to Company A. Company A then matches the invoice with the purchase order, secures the necessary approvals, and processes the payment by the end of the month.

Example 3: ABC Ltd. needs to transport goods from their factory to their warehouses. They create a purchase order (PO) detailing the transportation service requirements and any special instructions, agreeing on a price of Rs. 80,000.

Mr. X receives the PO and provides the transportation services. After completing the service, Mr. X issues an invoice to ABC Ltd. for Rs. 80,000, payable in 45 days. ABC Ltd. receives the invoice and compares it with the purchase order, checking with the relevant department to confirm that the transportation was performed according to the specified terms. If there are no discrepancies, ABC Ltd. records the invoice in their accounts payable and lists Mr. X as a creditor with the amount owed.

ABC Ltd. then follows its internal policies to review and approve the invoice. Once approved, they initiate the payment process and make the payment to Mr. X before the due date. After payment, ABC Ltd. updates its accounts team records to accurately reflect the transaction and its current liabilities.

An overview of the Accounts Payable process

The accounts payable (AP) process is fundamental to any business. It is responsible for nearly all payments outside of payroll. It ensures that legitimate and accurate invoices are paid promptly, safeguarding a company's cash flow and assets.

Understanding the AP Process

At its core, the AP process involves four key steps: invoice capture, invoice approval, payment authorization, and payment execution. While these steps might seem straightforward, the complexity lies in ensuring scalability and accuracy. With a robust AP process, companies can avoid late or missed payments, mismanaged cash flow, and damaged supplier relationships.

The Role of Internal Controls - Internal controls are crucial within the AP process. They prevent fraudulent or duplicate payments, ensure invoice accuracy, and ensure all incoming invoices are accounted for. Periodic professional reviews can help companies optimize these controls.

Impact on Financial Statements - Due to double-entry accounting, any human error or omissions in the AP process directly impact financial statements. For instance, unrecorded payable expenses can understate liabilities, while duplicate payments can overstate them. Accurate financial statements are vital for informed decision-making, making a well-functioning AP process indispensable.

Cash Flow and Supplier Relationships - A poorly managed AP process can have far-reaching consequences. Late payments can strain supplier relationships, leading to demands for cash on delivery – a potentially devastating scenario for cash-strapped businesses. Conversely, early payments can create cash shortages for other obligations.

To summarize it all, the AP process is far more than just paying bills. It's a critical component of a company's financial health, impacting everything from cash flow and supplier relationships to the accuracy of financial statements.

Prioritizing a streamlined, accurate, and well-controlled AP process is an investment in any business's long-term success.

Common Challenges and Solutions in Accounts Payable

Possibilities of fraud and risks

The Challenge — As transactions become more complex, accounts payable departments are also increasingly targeted by fraudsters. Having a manual process in place can make it difficult to detect common schemes like duplicate invoices, fake vendors, and payment tampering, leading to significant financial losses.

The Solution - Automation tools and solutions can safeguard your business against fraud. By limiting access to sensitive data and using AI to analyze supplier invoices and detect anomalies, companies can proactively prevent fraud. Additionally, real-time alerts allow for swift action if suspicious activity is detected, minimizing financial impact.

Audit & Reporting Problems

The Challenge — Manually collecting data from different systems and paper records makes audit trail and reporting time-consuming and prone to human errors. Plus, the lack of reliable access to information across platforms further complicates the matter of verifying data and past reports.

The Solution — An all-in-one automation system can fix these problems by bringing transactions, process data, and reports together in one place. Anyone can easily run and share reports without bothering others. A clear timeline of actions makes it easy to prove what happened and when for audits. Automatic alerts also make it easier to address any issues quickly.

Lack of visibility & control

The Challenge - Disorganized accounting systems often leave accounts payable department relying on guesswork rather than actual data-driven insights. Siloed platforms and manual processes can block visibility across the procure-to-pay cycle. This makes it quite difficult to identify bottlenecks, predict cash obligations, and maintain overall financial control. This uncertainty hampers the business owner's confidence.

The Solution - Opting for a connected digital platform is one of the best ways to mitigate this situation. The tools can offer transformative solutions by centralizing the activities into seamless procure-to-pay workflows. With in-depth analytics on all business transactions, intuitive dashboards empower executives to monitor key metrics like invoice processing times, cash availability, and early payment discounts in real-time, minimizing the need for end-of-month reports.

Automated notifications further improve visibility by alerting about upcoming due dates and new vendor submissions. This creates a sense of accountability throughout the process while also enabling business owners to strategically optimize dynamic discounting programs, payment status schedules, and supplier contract terms for comprehensive control.

 Invoice processing delays

The Challenge - Traditional invoice processing, often relying on paper invoices and manual data entry, remains a persistent bottleneck across industries. This outdated approach leads to inefficiencies, increased risk of errors, and delay in processing payments. These delays not only disrupt cash flow forecasts but also strain relationships with suppliers, particularly smaller ones who rely on prompt payments.

The Solution - Digital payable automation software offers a powerful remedy to these challenges. By leveraging advanced technologies, invoice data can be extracted instantly without manual intervention, reducing processing times from weeks to days or even hours. Additionally, workflow automation streamlines the approval process by automatically routing vendor invoices to the appropriate approvers based on predefined business rules.

Real-time tracking and timely notifications allow companies to monitor invoice progress and identify and address exceptions promptly. This fosters accountability across the organization while freeing up valuable time for employees to focus on more strategic tasks.

By embracing digital automation, businesses can transform their accounts payable process into a streamlined, efficient operation, ensuring timely payments, improved supplier relationships, and optimized cash flow management.

Accounts Payable Best Practices

Elevate your business with these proven accounts payable best practices, designed to optimize cash flow, streamline operations, reduce costs, improve service, and unlock new growth opportunities.

 Go Paperless - By implementing an eProcurement system, businesses can electronically generate purchase orders (POs), validate invoices on time, approve requisitions, track deliveries, and ensure timely payment. Depending on the level of automation adopted, tasks such as invoice scanning, delivery receipt tracking, and dispute resolution can also be managed digitally.

Have a supplier portal in place - Establishing supplier portals allows vendors to monitor order statuses, delivery schedules, potential product shortages, and received payments electronically. These systems not only save time but also minimize manual errors, thereby enhancing order accuracy.

Set up workflows - Implementing management workflows enhances the efficiency of accounts payable processes by identifying and resolving bottlenecks and streamlining process handoffs, thereby optimizing liquidity management.

Focus on improving purchasing approval system - Strengthening purchasing approval processes involves clearly defining the management authority levels required for various purchase sizes.

 Consolidating the operations and reporting - Centralizing accounts payable processing and reporting across the enterprise via a shared service environment ensures consistent practices, standard adherence among staff, and performance measurement against established business metrics. This approach enables faster task completion with fewer resources, leading to reduced enterprise costs.

Refine your vendor selection process - This is one of the important steps towards creating a solid accounts payable system at place. Here's how you can improve it:

• Prioritize and Involve: Clearly define your negotiation goals and involve key decision-makers like the CFO and CPO.
• Performance Scorecards: Develop scorecards for strategic vendors to track their performance and leverage them during negotiations to improve quality, service, or price.
• Negotiate Payment Terms: If your company has strong financial standing, negotiate longer payment terms to optimize cash flow.
• Always negotiate for the best possible price with your vendors. Ask them to match competitor prices or offer volume discounts.

Vendor data management procedure - After negotiating terms with your vendors, ensure you have a meticulous documentation of this crucial data. Inaccurate data can lead to payment errors, late payments, missed discounts, and even supply disruptions. Follow these steps to ensure accurate and up-to-date vendor information:

• Accurate Service Level Agreements (SLAs): Ensure that all SLAs are precisely reflected in your purchasing and payable systems. Include details like product/service specifications, quality standards, delivery timelines, supplier responsibilities, and applicable regulatory compliance requirements.
• Regularly Updated Payment Terms: Keep track of any changes or updates to payment terms, volume discounts, trade credits, or rebates. If contractual terms are modified or renegotiated, promptly update your supplier master data accordingly.
• Proper Contract Storage: Utilize document management systems to store supplier contracts securely and facilitate easy retrieval when needed.

By prioritizing accurate and current vendor data, you can streamline your accounts payable process, avoid costly errors, and maintain strong supplier relationships.

 Contractual review process - To prevent inaccurate or fraudulent vendor billing which can lead to overpayments or duplicate payments, it's vital to regularly review vendor contracts. Implement these best practices:

 Centralized Data Management: Assign a dedicated team to manage vendor data, ensuring completeness, accuracy, and adherence to standard terms. This team should also monitor vendor performance to ensure ongoing contract compliance.

• Accountability Clauses: Include contractual clauses that hold vendors accountable for fines and penalties if they fail to meet their obligations.
• Regular Contract Reviews: Conduct periodic reviews of vendor contracts, comparing them against industry standards and identifying areas for improvement or renegotiation.
• Legal Review: Engage your legal team to verify vendor authorization limits, assess contract terms for fairness and compliance with regulations.

By implementing a robust contract review process, you can mitigate the risk of billing errors, optimize vendor relationships, and protect your company's financial interests.

Supercharge Your AP Process with Spendflo

Managing the entire AP process can be quite daunting if you are still using an outdated approach. Redundant and manual methods are slow, error-prone, and costly in the long run which is why businesses are embracing automation to streamline their repetitive tasks while boosting productivity and efficiency.

 Business Insider estimates reveal that automation can dramatically cut invoice processing times by an impressive 73%.

Accounts payable automation can be a game-changer for your business -

• Speed: Drastically faster invoice processing
• Ease of Use: Intuitive interfaces for seamless operation
• Accuracy: Reduced risk of errors and fraud
• Cost Savings: Lower operational costs over time
• Organization: Centralized document storage
• Workflows: Automated approval processes
• Visibility: Real-time updates on invoice status

Spendflo takes your business's AP automation to the next level, with robust features like:

• Automatic Invoice Import and Verification
• Centralized Document Storage
• Automated Invoice Matching
• Streamlined Approval Workflows

Are you ready to transform your AP process?

Book a free demo with Spendflo today and see it for yourself!

Conclusion

In today's competitive business environment, maximizing efficiency and minimizing costs are paramount. Companies can't afford to overlook opportunities to optimize their working capital, and accounts payable (AP) offers a prime area for improvement.

Regardless of company size, AP automation presents a powerful solution. By streamlining AP processes, businesses can enhance cost management, simplify operations, and mitigate financial risks.

Furthermore, timely invoice processing frees up valuable time and resources, allowing employees to focus on higher-value tasks that drive growth and innovation.

FAQs

What is Accounts Payable?

 Accounts payable (AP) showcasess the short-term debt a company owes to its suppliers for goods or services received but not yet paid. It's a critical part of any business's financial operations.

What are some examples of Accounts Payable?

Think of accounts payable as any bills your business needs to pay, such as office supplies, software subscriptions, rent, utilities, and professional services.

Are there any benefits of AP Automation for small enterprises?

Small businesses can greatly benefit from AP automation. It frees up valuable time and resources by eliminating manual tasks, reduces errors, and improves cash flow visibility.

What is the difference between Accounts Receivable and Accounts Payable?

While accounts payable is what your business owes to others, accounts receivable is the opposite – it's the money owed to your business by customers.

How Automation improves the AP process?

Automation transforms the AP process through electronic invoice processing, automated approvals, and electronic payments. This results in faster processing, fewer errors, and better control over your finances.

 Why effective AP Management matters?

Effective AP management is important for many reasons:

• Strong Vendor Relationships: Timely payments build trust and goodwill with suppliers.
• Improved Cash Flow: Better visibility into your payables helps you manage your cash balance effectively.
• Cost Savings: Take advantage of early payment discounts to save money.
• Compliance: Ensure your business adheres to financial regulations.
• Fraud Prevention: Automation helps detect and prevent fraudulent invoices.