What is accounts payable?
To explore the accounts payable process, it’s worth taking a quick look at just what the term “accounts payable” encompasses. In a nutshell, accounts payable (AP) is what you owe, e.g., liabilities:
- Suppliers, third-party vendors, and other service providers for purchases made through your sourcing and procurement processes
- Travel and expenses for management, sales reps, event and tradeshow attendance, etc.
- Operating costs for utilities, office maintenance, supplies, etc.
An organization’s Accounts Payable department can be freestanding, or under a general “Finance” rubric, combined with Accounts Receivable (which we’ll explore in detail in other articles) – it all depends on the size of the company and the complexity of its operations. Small businesses generally combine all related accounts payable procedures. Regardless of where AP sits, the department handles supplier/vendor invoices and the overall invoice management process, internal and external expenses as described above and three-way matching of invoices, purchase orders, and receiving reports (again, we’ll explore that topic in detail in separate articles), all as part of an organization’s overall cash flow management. In this regard, it works hand-in-hand with procure-to-pay (P2P).
When business disruption hits, the first question many companies ask is how long they’ll be able to keep going on without ongoing revenue. That’s when Accounts Payable (and the accounts payable process flow) goes from back office to front lines, and the true value of the AP team gets recognized. A business resilience strategy has to go across all functional areas, and how accounts payable procedures are managed play a big part of that.
Especially Accounts Payable automation.
Looking at the AP process overview in general, it’s easy to see where – and just how much – an automated accounts payable workflow can boost productivity – and business continuity – dramatically. Accounts payable, which plays a crucial role in helping ensure an organization’s financial wellbeing, can’t operate nearly as effectively using manual and/or paper-based AP processes. In extreme cases of business disruption, e.g., where teams are working remotely, the process might not be able to operate at all. If AP is all about managing liabilities, then a manual process is the biggest liability it has to deal with.
Without AP automation, the entire process is slower, more errors happen, documents get lost, volume and pricing discounts are missed, and relationships with suppliers suffer – all of which create enormous risk to the organization.
The accounts payable process
What automation does to your account’s payable workflow – beyond keeping cash flow moving – is ensures business continuity by automating the tedious low-value and repetitive invoicing tasks that manual operations have to do by hand. In the process, it enables visibility across every step so AP teams have real-time situational awareness. That means wherever your workforce is, the AP process can still operate seamlessly.
A quick walk through of the AP function is the easiest way to see where automation can make the biggest impact so you can better assess your needs and options.
Key steps for AP
1. Purchase Orders (PO)
You can’t have payables without purchases. Purchase Orders are documents sent by buyers in the procurement / purchasing department to suppliers detailing a request for goods and services required to meet a company’s needs. At a minimum, a purchase order, or PO, will have a description of the goods or services acquired, the quantity or other details, and additional information such as volume or pricing discount parameters, and of course the pricing and payment terms.
In an efficient, streamlined purchase order process, POs will also ideally be routed through to AP teams. While these will be used later in the three-way matching and payments processes, at this stage POs can provide additional spend management control by giving Finance visibility (real-time visibility if using an automated accounts payable process flow) on pending purchases, as well as future purchases. Along with better budget management, this allows additional spend control before the money goes out or commitments made.
2. Receipt of Goods & Services
Before an invoice gets paid, you need to know that exactly what was ordered by Procurement has indeed been received. In other words, did the company get what it asked for? A receiving report documents what was actually delivered to a company as completed by receiving staff accepting the goods (the process is somewhat different for services). It should include information such as delivery date and time, shipper, item description/quantity, condition, and – incredibly important – the authorizing purchase order number.
Receiving reports are the third leg of the three-way match triad, so obviously they are a crucial part of the invoice and purchase order verification process before any invoice payments go out. As such, they need to be reviewed in excruciating detail. With an AP automation solution, this process is greatly speeded up and definitely more accurate.
3. Invoice Management
After the receipt of goods or services has been acknowledged, expect a bill. Invoices arrive in both paper and electronic forms, and depending on the size of a company, there can be hundreds or thousands of invoices in constant motion. As mentioned earlier, Accounts Payable is all about liabilities, and accurate, timely payments are vital to maintaining organizational reputation, supplier relationships, and cash flow – early payment discounts or late payment penalties hang in the balance. This is no time for a manual, paper-based process.
Accounts payable automation with three-way matching capabilities streamlines the invoice approval process by identifying and verifying that what was ordered (PO) was delivered (receiving report) and jibes with amount being billed on invoice data. Speeding payment processing tasks through faster and more accurate review of documentation and the approver path also mitigates risks associated with incorrect billing amounts, helps identify potential fraud, eliminates discrepancies, and simplifies internal controls, auditing, and bookkeeping.
4. Payments & Record Keeping
If up to this point everything looks good, the payment goes out. Depending on an organization’s bookkeeping process, payments can be manual check-based, credit cards, or electronic/digital (we’ll cover those in detail in subsequent AP blogs). The bookkeeper or finance team members process the payments ensuring any applicable discounts are included, applying and recording payments to appropriate budgets, ledger accounts, bank accounts, and other details.
Automation can also play a significant role in payments, eliminating manual checks and human errors by accelerating straight-through processing via integration with any existing ERP, finance systems and accounting software to ensure greater accuracy and timeliness. For businesses with a high invoice flow, automating payments helps optimize a company’s cash flow. The subsequent ease of record keeping, auditing, and reporting on financial statements is an enormous benefit.
How can automation help accounts payable?
Accounts Payable automation equals speed, ease, and accuracy, regardless of how big a company is or what industry it works in. The real benefit is how automation extends across the entire AP business process workflow from end-to-end, creating transparency and data veracity along the way. Manual processes are slow, cumbersome, and costly, not to mention error and risk prone.
Automating AP eliminates the expense and time crunch of manual data entry (invoice processing, anyone?) and delays in approval times. Integrating with other systems ensures that supplier details and other information from POs and invoices is accurate and verifiable, and can pull data directly from documents. AP automation reduces late and/or duplicate payments and double entry, helps secure early vendor payment discounts, boosts vendor relationships while reducing the incidence of late fees, saving time and money that improves cash flow.
Whether operating during major business disruption or more normal periods, Accounts Payable plays a critical role in maintaining the health of an organization. By significantly improving the efficiency and effectiveness of the AP department and processes, not to mention autonomy and continuity, automation has to part of every Accounts Payable strategy if a business wants to achieve resilience and competitive advantage.