Is Outsourced Accounting Right for Startups?

Accounts payable or AP is the total amount of credit a business has taken from sellers of products and services that it intends to pay at a later date. AP is an important area that has to be managed very strictly to ensure good cash flow and proper relations with the suppliers. An optimized AP workflow guarantees that organizations can quickly make timely payments to vendors, leverage early payment discounts, and avoid late payment penalties.

Accounts payable workflow entails the application of various solutions to help manage accounts payable transactions in organizations.

The accounts payable process refers to the overall cycle of activities that involves receiving invoices from vendors, processing, approval, and payment of invoices. This includes the processes that are followed and steps that need to be taken when capturing the incoming invoices, matching the invoice data, getting approval on the invoices paid, choosing the modes of payment and the steps to be followed for matching the payments with the records in the AP.

The core components of the AP workflow include:

- Receipt of invoices – All the invoices that are received in the business whether in a physical manner through mail or electronically, through emails or online submission by vendors. This entails converting paper bills into a scanable format or receiving electronic bills.

- Accounts payable – Keying in the invoice information and points to the total general ledger code.

- Control of cash payments – Ensuring checks, drafts, and other negotiable instruments are controlled by managers based on established authorization limits.

- Purchasing – Deciding on the payment mode, checking out various offers, payments due, due dates, and releasing payments.

- Accounts payable control - Checking correspondence between the payment vouchers and vendor invoices and recording payments in vendor accounts.

What Makes AP Workflow Critical?

An efficient AP workflow process allows companies to:

- Ensure invoices are checked for compliance and financial control before payments are made to prevent cases of corporate fraud. This ensures that the organization does not pay for wrongful or fake invoices as noted by Davenport and Prusak (1998).

- Reduce fraud instances due to the lack of purchase orders or employees making purchases without receipts by matching purchases to purchase orders and receiving documentation.

- Leverage prompt payment discounts from suppliers for efficient and fast account receivables. This reduces costs.

- Paying your invoices on time helps you to evade the delays which in turn attracts late fees and collection calls. This is to maintain a good and healthy relationship between the company and the vendors.

- It is important to synchronize cash outflows with the inflows in a business as this helps to maximize the amount of money in the business. This prevents cash shortages.

- Make spending patterns transparent for specific categories by linking them with approval workflows. This enables forecasting.

Accounts payable is the section that handles the processing of supplier invoices and payments and the following subtopics are discussed to explain the workflow of accounts payable:

While each company will have a customized AP workflow, the key steps include:

1. Receipt of invoices – Invoices in paper form are received, sorted, and entered into the system while electronic invoices are directly entered into the accounting system. One common type of rule in the email inbox can include the forwarding of invoices to the AP department.

2. Invoice processing – In the manual system, AP clerks enter headers such as the vendor name, invoice number, invoice date, and due date, and line items such as quantity, description, rates, etc.

3. Workflow approval – After approval, the invoice information is forwarded to managers for further authorization depending on certain aspects such as multiple signatures in large amounts. In a multilevel approval process, the approvers may choose to ask for more information about an invoice or even reject the invoice.

4. Supplier payment timing – The timing for payment is determined depending on the cash on hand and discount options. Facilitative data includes remittance details and the identification of payment methods.

5. Check payments – Checks are prepared and issued through mail or distributed on the payment date while online payments – ACH transfer, wire transfer, and electronic payments are processed on the same date.

6. Payment reconciliation – Last but not least, the issued payment is compared to the invoice, and the vendor account balance is adjusted in the ledger. There are chances that statements may be sent to vendors.

Accounts Payable Automation Systems

The benefits of automating the Accounts Payable process through the use of software systems include; reducing manual work, facilitating the routing of invoices, sending payment reminders, and adopting procurement systems.

Popular features of AP automation systems include:

- Implementation of OCR to retrieve data from paper-based invoices
- Setting up specific routing procedures according to the amount of invoice number and the vendor.
- Electronic sign-on-sign-off process that requires appropriate user authentication.
- Analytics and reporting of accounts Payable Management
- Payments and remittances through the use of electronics.
- ERP and procurement and payment systems integration
- Some of the basic functionalities surrounding invoice archiving and retrieval.

Automating AP workflow is advantageous for employees and may even cut down on paper and postage expenses in processing AP transactions. It might take a while before an organization implements automated AP solutions because of the capital that is needed to put the systems in place but if that is done, the organization saves a lot of money and also gets to see where the money is being spent.