Managing your business finances is stressful, especially when it comes to your supplier payments. Even with the new technology, industry standards, and best practices in finance, the time and labor that go into invoice management remain deeply frustrating.
Business Wire revealed that a staggering 72% of finance teams spend up to 520 hours per year on accounts payable tasks. But what exactly is AP? And how can we make this process more efficient?
In this blog, we will dive into the importance of accounts payable, its role in business and some of the best practices to optimize your work process. Towards the end, we will give you some great tips on how to save countless hours on AP administration.
What Is Accounts Payable?
Accounts Payable (AP) represents a sum of all company’s short-term financial obligations to its suppliers in return for provided goods and services. It appears on the business balance sheet under “Current Liabilities”.
When a company orders goods or services on credit instead of paying for them upfront, it acquires accounts payable. AP payments rely on the contractually-supported promise that your business will complete payment in the future without incurring penalties such as growing interest or fees.
It is important to note that AP represents only your company’s current assets and counts the debt your suppliers expect you to pay within 12 months. Any obligation you plan to pay off later will be tracked under a different account on your balance sheet.
Additionally, the term accounts payable is commonly used to refer to a department responsible for the company’s administrative, financial and clerical support. In the next part of our blog, we will provide examples of the invoices the AP department is typically responsible for.
Examples of Accounts Payable
Accounts payable is introduced on the balance sheet as a liability representing the company’s current short-term debt to third-party suppliers. But what kind of expenses a business might list under AP in their financial statements? Here are some common categories falling under the accounts payables range:
- Office lease and utilities
- Equipment
- Subscriptions
- Contractors
- Transportation and logistics
Often, accounts payable includes trade accounts payable. Trade payables represent the money owed to the suppliers for inventory management costs, such as raw materials, office supplies, ingredients, etc.
Moving from the range of accounts payable, let’s now distinguish the term from its financial counterpart, accounts receivable.
The difference between Accounts Payable vs. Accounts Receivable?
While accounts payable represents your company’s short-term debt to the suppliers, accounts receivable (AR) represents customers’ liability to your business. In short, AR is the total sum of funds expected from your customers for received goods and services, which is listed under “Current Asset” on the balance sheet.
Similar to the AP, accounts receivable isn’t just a financial term. It’s also the name of the department that handles AR transactions. Once your products or services are delivered, it’s the job of the accounts receivable department or clerk to invoice the customer and register the charged amount in the accounts receivable ledger.
What Is the Role of Accounts Payable?
The accounts payable team handles short-term credit invoices, ensures a balanced ledger, and provides reliable data for financial statements.
The AP department is directly responsible for maintaining high accounts payable turnover ratio and providing valid data for financial statements like month-end close, ensuring financial transparency and stability of the company.
The AP department plays an essential role in any organization by performing crucial steps for effective invoice management:
- Keeping the master vendor file
- Receiving and categorizing invoices
- Uploading invoices into financial management software
- Verifying and matching invoices
- Routing invoices for approval
- Processing payments
In addition, the AP department handles vendor inquiries, negotiates payment terms with pro forma invoices, and ensures timely vendor payments. Thus, AP management helps maintain financial order and efficiency within an organization, safeguarding the company’s financial integrity.
But what exactly is the process of even acquiring AP on your balance sheet? Read the next part of our blog to understand the full accounts payable process.
The Accounts Payable Process
Although managing accounts payable is fairly straightforward, each stage involves various procedures that influence the financial strength of your company. Traditionally, the accounts payable process consists of the following steps:
Receiving and processing the purchase orders
This process typically starts with the purchase order or pro forma invoices, which is a document that is used to order goods or services. The purchase order is sent to the supplier, who ships the goods or provides the services.
Creating and validating the invoice
Once the goods or services are received, the invoice is created. Before the invoice is sent to the accounting department, it is validated to ensure that all information is correct before the payment occurs. An additional authorization layer can be added to the process. For instance, if the invoice sum exceeds a certain threshold, validation of an executive member is required. After validation is completed, the invoice is sent to the accounting department.
Completing payment process
The invoice is received by the accounting department and the payment process is initiated. The accounting department may use a variety of methods to pay the invoice, such as writing a check, transferring money to an account, or using a credit card. Once the invoice is paid, the accounting department updates the accounting system to reflect the payment.
Establishing a strong accounts payable procedure ensures an efficient payment process that improves supplier relationships. While traditional AP processes have improved precision and efficiency, there is significant scope for refining these conventional methods. Further in this blog, we’ll explore the best practices to optimize your accounts payable processes.
Accounts Payable Best Practices
As your company grows, the process of managing your accounts payable becomes more complex and time-consuming. From processing orders to initiating the payment, the responsibilities that come with traditional AP practices are quite overwhelming.
In this part of the blog, we will provide examples of the AP practices that will allow you to save time, reduce costs and improve your supplier relationships. Here are only a few of the best practices in accounts payable that will effectively streamline your invoice payment process:
- Establish a system for tracking your AP process – A spreadsheet or accounts payable software will help you manage your AP by monitoring all your invoices effectively. This method ensures priority invoices are paid first, promoting timely payments and accurate record-keeping.
- Set up payment schedule – Establish a payment schedule to enhance your AP process. You can prevent missed or late payments that could harm your company’s reputation by outlining when invoices are due and setting payment terms that align with common settlement periods.
- Eliminate AP fraud – Prevent invoice fraud in the accounts payable process through strict financial system controls, routinely reviewing vendor payments and invoices, and utilizing fraud detection software.
- Limit access and establish internal control – Shield your organization from internal fraud by establishing internal authority within the AP process. Limit access to the master vendor file and offer better control over the approval process by allocating and periodically rotating tasks to various employees.
- Use AP automation – Increase efficiency, reduce manual labor, and streamline your accounts payable management by employing software solutions to automate invoice processing and payments.
Benefits of Accounts Payable Automation
Nowadays, countless tools can streamline your company’s AP management. However, accounts payable software remains the most effective and cost-saving solution among all other options. Various AP automation software utilize innovative technologies such as OCR (Optical Character Recognition) and AI, limiting the need for manual input.
It is crucial to note that each software on the market offers different features. However, for the ultimate impact on your AP management, your automation software must provide you with the following benefits:
- Efficient data entry – Allow your employees to invest time into tasks that matter, eliminating the need for repetitive manual data entry with OCR automatic field recognition.
- Accurate records – Eliminate human errors by allowing AP software to extract crucial data from invoices.
- Accessible data – Get financial insights and prepare your liability records for financial statements by making your AP data easily accessible and organized.
- Secure environment – Prevent the submission of duplicate or fraudulent invoices by using fraud detection analysis within your AP automation software.
- Clear authority – Swiftly approve invoices by automatically involving solely authorized employees in your review and approval process.
- Strict compliance – Maintain full and accurate data for account statements and audit trails to comply with financial regulations successfully.
Get started on automating your AP
Forget tedious manual data entry by automating your accounts payable process with Klippa SpendControl. Our award-winning solution allows you to streamline your AP management with just a few clicks, providing a new sophisticated workflow.
Timely approve expenses & invoices, forget about manual data entry, prevent fraud and comply with financial regulations within just one dedicated platform. Increase employee satisfaction and improve supplier relationships while saving precious time and reducing manual labor.
Klippa SpendControl provides access to key features for upgrading your accounts payable process:
- Mobile & web environment offer 24/7 access to your organized AP data
- Built-in fraud detection reduces the risk of invoice fraud with machine learning
- Accurate data extraction eliminates human errors with our #1 OCR technology
- Custom authorization flows and business rules streamline your approval process
- Multi-currency support allows you to process expenses & invoices from all regions
- Ready-to-go accounting and ERP software integrations
Do you want to level up your accounts payable process? Are you looking for the ultimate solution for your company’s financial management? Book a free demo to see our product in action, or contact our SpendControl specialists for more information. Start investing your time into things that really matter!