What Are The 4 Functions Of Accounts Payable?
In terms of definition, the Accounts Payable Department can be described as an organizational unit that handles all of the organization’s financial obligations, or what is also commonly referred to as accounts payable.
If you own a business that purchases goods or services from suppliers and vendors, you will require a system that keeps track of the amount owed and how long it takes to make the payments. This is where the Accounts payable department comes in, having the responsibility of managing all the payments that the company incurs when procuring goods and services for its operations.
Accounts payable or AP deals with duties of payment of accounts that are payable within a short time or payable in the short term to creditors and vendors. In summary, AP controls your financial responsibilities and guarantees that suppliers or sellers receive the correct amount of payments on time.
Accounts payable is an essential factor in ensuring that the company enjoys a good rapport with its suppliers and is also not blacklisted for not paying its bills. Delays hurt the business because they may not be able to pay for services in the future due to the negative effect on their image.
While the exact AP procedures vary by company size and industry, there are four core functions carried out by every account payable department:
1. Processing Invoices
Every time goods and services are purchased and delivered, the vendor then provides a statement showing the amount owed together with the due date. Accounts payable staff have the main responsibility of processing these invoices with a high level of precision.
This includes the authentication of each invoice against procurement orders and receiving documents to ensure that delivered quantities, at agreed prices and in compliance with contractual provisions, corresponded. Paid invoices are then entered into the AP system to wait for payment on the due date or at the due date.
Effective invoice processing ensures that suppliers are paid only once and that the amount paid is correct thus avoiding the embarrassment of having to recover the money later. It enables one to determine and set aside the necessary funds for future payments that are expected within the year.
2. Making Payments
The most obvious task that falls under the remit of the accounts payable department is the payment of outstanding debts and balances to suppliers and vendors. Depending on due dates and payment terms, payments by the AP staff are made through printed check payments, electronic transfers, credit card payments, or any other acceptable means.
AP must ensure invoices match the details on purchase orders, check for early payment discounts if any, determine the right payment method according to vendor’s preference, and look out for payments on hold due to reasons such as disagreement or some other reason.
In most firms, AP handles high volumes of transactions, negotiating thousands of cheques every month. The methods of payments and the automation of work processes are critical success factors for optimal results and low error percentages.
3. Maintaining Vendor Relationships
In addition to timely payments, accounts payable offer a way of communicating for the procurement teams and the various vendors and suppliers. Since AP staff interact with vendors often, especially when verifying invoices and payments, they usually provide the best assessment of the reliability of the vendor.
Thus, accounts payable can enhance these business relationships by sharing feedback in both ways and resolving any invoice issues or controversies quickly and securely to gain better cash flows and vendors’ loyalty from high-quality and reliable vendors. Especially when the overall usage of e-procurement systems and the electronic data interchange or EDI becomes more widespread in companies, this coordination kind of role will be required.
4. Financial Reporting & Analysis
To be precise, accounts payable has mountains of data on payment, and that makes them ideal candidates for finance reporting as well. One is, for example, AP contributes to spend analytics by categorizing spend by vendor or by expense type with a view of identifying where savings could be made.
Other benefits of analyzing the historical payment data also include the ability of the accounts payable team to predict the required funds in the future. It further measures AP efficiency through the cumulative days it takes to pay the invoice or Days Payable Outstanding (DPO), as well as payment terms averages.
The above approach also helps in identifying the vendors that are late frequently so that necessary corrective action can be taken. Such kind of analysis and reporting assist in preventing risks such as cash deficits and enhance control all through the procurement value chain.
Before moving any further, you must get your accounts payable fundamentals right.
Managing the accounts payable process reasonably appears to be straightforward when the concept is explained as paying bills and making vendors happy. However, in the real world, the AP departments work with a large amount of financial transactions, communications, and analyses to ensure payment processing operations go well.
As applications of technologies and usage of digital payment methods open up many prospects in the A/P, it can be securely stated that the basic jobs concerning invoice management, payment of vendors, relationship management, and usage of analytics reports will remain intact.
Many firms cannot optimize their payables management without putting these basic accounts payable factors in place, building the basic framework for a higher level of payables management. If your AP department is struggling or simply in need of some advice on how to get back to the fundamentals or improve its core competencies, consulting a professional in this field could be beneficial before considering software as the solution.
Culturally, always focusing on the big aspects of accounts payable is always worth it because of the overall increase in cash flow, compliance in payments, and healthy relationships with vendors, as well as the insights to help the procurement department make better decisions in the future.
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