How Do You Do Accounts Payable?
Accounts payable is simply a process that involves the paying of the various invoices that a business or an organization receives in the course of its operations.
Accounts payable (AP) is the amount of money, which is owed by a business to the supplier or the vendor for the purchased materials and services. This function has a great impact on both supplier relations and the company’s cash flow as it is responsible for managing accounts payable. This guide is designed to provide you with a step-by-step approach to handling accounts payable processing.
The account payable system is a very important system that must be put in place well so that you can ensure that you are handling it in the right manner.
The first activity in the AP cycle is to develop processes and select technology to support the management of AP. Key elements to set up include:
- Accounts Payable Account List – Develop GL codes for major accounts payable categories such as office supplies, raw materials, equipment lease expenses, etc that will be used for reporting expenditures.
- Supplier Master List – Ensure that supplier details such as payment terms, remit addresses, and tax identifiers are correct. This forms the background for issuing payments to support the invoices.
- Process – Determine the purchase order, receipts/invoice, and payment process, to ensure that there is a clear transfer between departments.
- AP Software - A selection of a suitable cloud-based AP automation solution to manage approvals electronically, data extraction from invoices, and integration with the chosen accounting system. Some of the current options include Bill.com, Intacct, and Netsuite.
Receive and Record Invoices
This is the initial step in the accounts payable process upon receipt of an invoice. Follow these steps:
1. Incoming Post – Gathering of invoices that may be received through mail or email daily. Forward to AP clerk for further action/processing.
2. Review and Approve - After a brief examination of the invoice to ascertain that it is complete, contains all necessary documentation, and has the correct quantity or service delivery, the AP clerk signs it. The invoice is then forwarded through the workflow for the required departmental approval depending on policy limits.
3. Posting – Once the AP clerk approves the invoice, he or she inputs the data into your accounting software and assigns the correct general ledger account numbers.
4. File Documentation – Keep the records of purchases such as receipts, or other papers in a file or scanned documents for future use.
Manage Payments
That brings us to the last stage of voucher processing which is Payments. Follow best practices like:
- AP aging summary report: keep an updated list to easily see who’s due next and which invoices are of high importance. Payments should be sorted in terms of due time and the amount of money needed to take an early payment discount.
- Combine many invoices to make weekly or bi-weekly check runs where you combine various invoices. This is more advantageous than carrying out individual checks.
- Use ACH payments, virtual cards, or wire transfers as a means of electronic Fund transfer. These are secure and the suppliers get the details of remittance via the internet.
- When using paper checks, the use of authorized checks with the second signature should be printed with endorsement details and remittance accompanying the check. It is recommended to always keep the physical check stub or a duplicate with you.
Reconcile Accounts
Account reconciliations should be performed regularly because they ensure accuracy. It is used to match the AP transactions you recorded with the bank statements and payments to detect mistakes. Follow these reconciliation procedures:
- Ensure that the checks you issued correspond with the ones that clear your bank account! When there is a corresponding adjustment, make any correcting entries for mismatches.
- Check on unpaid amounts to ascertain whether there are lost checks or disputes that may be causing the vendor not to clear an invoice.
- Check and reconcile all payments made between books and bank, to ensure timing or amount difference.
- Use the following approach to seek open credits from vendors through talking to the supplier, speaking about the difference in the invoice amount and the credit memo or even asking the supplier to issue a refund check.
- Re-classify AP records for write-offs of all unclaimed credits older than one year.
Improve Accounts Payable
With the fundamentals handled, focus on improvement areas like:
Streamline Workflow: Eliminate delays associated with the routing of invoices for approval. Add email notification to the approval process if the defined approvers take too long to approve or reject the request.
Negotiate Terms: The last one is to negotiate for 60 days’ payment terms from vendors to reduce the burden of cash flows. Incentivize early payments.
Go Paperless: Reduced physical filing cabinet use through the utilization of Electronic invoicing, Online portals as well as scanned documents.
Pay Cards: Replace paper checks with virtual single-use cards to cut expenses. Improve security & receive cash-back rebates.
Supply Chain Financing: Reduced costs through the use of supplier rebates, structured settlements based on early payments, or third-party funding.
Leverage Analytics: Understand AP trends from an analysis of vendors, historical accounts, expense categorization, and others Obtain ideas on additional cost savings across the firm.
Automate Processes: Utilize RPA bots for consolidating invoices or use OCR to implement smart invoice scanning. In fact, in some organizations, even the approval of the invoices that are matched with the values in the PO can be done automatically by the AI system.
Centralize Globally: Centralize AP tasks on a worldwide or regional level across different business functions into global or regional service centers that are always available.
The steps above can be considered as a blueprint for managing accounts payable and ensuring that cash flow is on the right track. AP can then explore these opportunities and bring beneficial changes to the procurement organization as a strategic function. It’s important to invest in automation, in best practices – all this generates long-term value.