Accounts Payable (AP) doesn’t always take center stage as companies strive to expand, increase sales and build an advantage over the competition. And isn’t always a top priority for management even though it should be, since good AP management results in better vendor relationships, the opportunity to take advantage of discounts, and avoidance of late-payment fees.
Why Your Accounts Payable Processes Are in Need of a Makeover
AP processing deserves more attention. Delayed payments to vendors can erode goodwill with valued suppliers and impact payment terms and service levels. Paying invoices early may also allow companies to take advantage of discounts (e.g., 1% Net 10 Days) that can add up over time. By taking a strategic accounts payable approach, organizations can leverage these and other opportunities.
If you haven’t assessed your AP workflows in the last few years, then it’s definitely time for a thorough evaluation of the people, processes and technology you’re using to manage accounts payable.
How to Streamline Your AP Processes in 9 Steps
Roughly 55% of companies still handle their AP processes manually, providing an opportunity for major improvements. Even companies that have automated some or all of their AP processes could benefit from a makeover.
Here are nine ways that companies of all sizes can improve their AP structures and develop more efficient, productive approaches to this important accounting function.
1. Reevaluate Your Basic AP Operations
It’s time for thorough introspection and an honest assessment of how you’ve been handling accounts payable up until this point. Are you managing it manually? Are you receiving and scanning paper invoices from vendors when electronic version are an option? Are you consistently receiving follow-up requests from them about unpaid invoices? Other red flags to look for during this exercise include:
- Accounting staff and managers who are spending too much time processing invoice approvals.
- Vendors that are kept in the dark about overdue payments (and when they’re going to get their money).
- Lower levels of service from the vendors that aren’t being paid on time.
- Inconsistent AP processes (this is especially prevalent in larger companies that have multiple divisions or locations).
- Decentralized invoice processing and payments distribution.
- Work redundancies across different AP departments.
By mapping out their AP processes, companies can get an accurate view of what functions their AP software will have to handle while at the same time identifying potential gaps in their current accounts payable efficiency.
2. Rethinking Outdated Processes
If invoices continue to pile up month after month—waiting for that dreaded phone call from your suppliers, requesting money—then your accounts payable process probably needs an overhaul. Your choices include outsourcing AP, automating the process or updating your current accounts payable process. Each of these options is vastly better than manual and paper-based processes, which are especially inefficient and tend to introduce errors, redundant data entry and other issues into the AP workflow. If your company is spending entirely too much time managing AP, it’s time to reassess your current approach and find new ways to make the end-to-end AP process more efficient.
3. Standardize Inefficient AP Processes
Start by making sure your suppliers know exactly who to send their invoices to. And, develop a process that clearly outlines exactly what procurement professionals or field approvers should do if they receive invoices from vendors (versus letting the invoices sit on their desks, gathering dust while suppliers wait to get paid). Inefficient invoice receipt practices are a great place to start standardizing your AP processing. For example, if vendor invoices are sent to individual departments and frequently get lost or misplaced, then have them flow into a central location instead.
As those invoices arrive, make sure they’re ordered according to priority and due date. Use an accounts aging report to manage those due dates, with labels like “current” and “past due 1-30 days” to organize and stay on top of bills. By standardizing how invoices are received and approved, you can speed up the procure-to-pay cycle and maintain good relationships with suppliers.
Strive for simplification as you work through these and other standardization techniques, knowing that the time you put into this exercise will not only ensure that vendors get paid on time, but will also free up valuable time for accounting staffers, department managers and the CFO.
4. Accept Electronic Invoices
Many companies rely on manual approvals and paper-based invoicing processes. Here’s the good news: Thanks to advancements in technology and software, this otherwise time- and resource-intensive process can be automated and much easier to manage. With computers handling much of the heavy lifting that accounting employees once handled, receiving and paying invoices electronically helps companies save money and time while letting employees focus on more important tasks.
Electronic invoices also help to transform the repetitive AP process into a more optimized system that requires fewer “touches,” minimizes errors, and ensures that suppliers are paid in a timely manner.
5. Figure Out How You’ll Pay Invoices
Determining when you will pay invoices sounds like a no-brainer, but it’s actually an important step that will help set expectations for your vendors and your own company. Some of the more popular options include:
- Batch the payments according to due date and pay multiple invoices that are due within certain timeframes simultaneously.
- Pick certain days of the month (i.e., the 1st and the 15th of every month) when you’ll pay invoices.
Also consider how you’ll pay the invoices. Will you cut a paper check and mail it? Are you using ACH for recurring invoices? Will you use a credit card online via a service like Stripe if offered? As you make these decisions, be sure to document them in a manual that all employees can refer to. That way, the entire organization will understand the AP procedures and be able to share them among team members and with vendors who inquire.
6. Use AP Automation
Accounts Payable is a time-consuming process that has to be managed on an ongoing basis, and has historically relied on manual processes. In other words, it’s ripe for automation. As companies grow, adding more vendors and payment responsibilities along the way, the need for automation grows.
Accounting software can automate payments and other AP processes, reducing the burden on the accounting department. By moving to an automated system, companies:
- Avoid losing paper invoices
- Can expedite payment authorizations
- Better organize their records
- Can remit payments or take care of other AP tasks from anywhere (with a cloud-based system)
Automating processes that were once handled manually using paper, spreadsheets and disconnected systems also leads to major efficiency and productivity gains. It also helps save money, frees up employees to focus on more meaningful work, cuts down on errors and reduces the chance of fraud.
7. Delegate Where You Can
As you assess your current AP processes and determine which steps you’ll need to take to improve them, look for ways to delegate tasks and responsibilities to colleagues.
For example, if you’re still expecting to receive several paper invoices every month, select a specific point of contact for receiving, scanning and inputting them into your AP system. That way, if an invoice is lost or a payment is issued late, there will be one point of contact for the vendor. You can also assign team members to other roles to distribute the AP responsibilities evenly and free everyone up to get more important work done.
8. Eliminate Manual Data Entry
Time-consuming, tedious, expensive and error-prone, manual data entry reduces accounts payable efficiency and opens up a lot of opportunities for mistakes. As accounting team members take the data from vendor invoices and manually enter it into their computers, errors are both inevitable and expensive.
For example, even just one missing number or misplaced decimal point can translate into major costs for a business. If an automated system is programmed to pay a supplier $35,000 instead of $3,500, for instance, that mistake can significantly impact the bottom line. Once identified, the problem then has to be resolved—yet another time and resource drain for the organization.
Multiply this mistake across several invoices and it’s easy to see why eliminating manual data entry is a critical reason for streamlining the AP process. Implementing an ERP system with AP automation allows companies to capture all invoice data, sync it with their accounting system, check all the data for accuracy (e.g., against issued purchase orders) and minimize the chance of data errors.
9. Archive Data Effectively and Automatically
The AP process doesn’t end when the invoices are paid. It also includes the post-payment archiving of data that can be retrieved, reviewed and acted on (as needed) at a later date. Be it paper-based or digital, this historical record of all vendor bills that have been settled is a vital part of a company’s financial records.
Along with reducing data entry errors, AP automation software provides this “digital paper trail” and gives employees control and time back in their day to work on more important projects.
With cloud-based software there is a centralized database of AP information that authorized team members across all departments can interact with and access from anywhere.
Should You Consider AP Automation for Your Business?
According to Ardent Partners, 55% of businesses view their AP departments as either “very” or “exceptionally” valuable to the overall enterprise. Despite the perceived value, processing invoices still costs companies more than it should. While best-in-class AP departments had average invoice processing costs of just $2.18 per invoice, laggards spent $12.60—nearly 500% more.
With delayed invoice approvals, an abundance of paper and poor visibility into invoice and payment data, companies are increasingly turning to AP automation. In return, these companies are benefitting from better AP analytics, eliminating paper, lowering processing costs and improving supplier collaboration.
With an estimated 81% of companies impacted by payments fraud in 2019, AP automation helps businesses safeguard against fraud by controlling which employees have access to invoice approval and the release of payments. They can then build approval workflows with multiple people and increase the chances of catching fraudulent invoices before the payment is processed.