The Accounts Payable (AP) Process
In business, it is not always obligatory to immediately pay for any goods or services received from vendors. Instead, goods and services can be bought with the trust that the payment will be made by an agreed upon due date. Accounts payable (AP) refers to such due payments, and the AP process deals with the timely fulfilment of all such short-term and in some cases long-term payment obligations that a business owes to its vendors. The main goal of the accounts payable process is to verify the authenticity, accuracy and timeliness of all payments made by the business to its vendors.
The accounts payable process can be boiled down to four simple steps:
- Receiving the invoice
- Verifying the authenticity of the invoice
- Updating the data in the invoice database
- Ensuring payment within the due date
Improving The Accounts Payable Process
The accounts payable process is a significant part of any business, and as such deserves a great amount of attention. At face value, the AP function may be considered a relatively straight-forward process, which can cause business owners to overlook the potential of optimization. In reality there are many ways that the accounts payable process can be streamlined for improved efficiency, and businesses looking for an efficiency boost should consider optimizing this function. Here are ten ways an accounts payable process can be optimized.
Revamp The Workflow
The workflow is the first stop on the road to accounts payable process optimization. Before optimizing any process, it is essential to map out the workflow. By mapping the process step by step, business owners can analyze and identify any hurdles and inefficiencies in the process. Once the process has been mapped, the next step is to identify the potential inefficiencies in within the existing workflow. Workflow adjustments to optimize the process should then be proposed. This requires a detailed conversation with the accounts payable team that can suggest ways to overcome the impediments.
See Also: What are the Important Steps of the Accounts Receivable Process?
It is also important to remember that revamping the workflow once is not enough. A smart idea is to revisit the workflow at regular intervals, such as an annual evaluation. As technology and ideas progress, new ways to overcome business hurdles develop. A regular evaluation and revamp of the workflow to incorporate new ideas can give the business a great advantage in the competitive landscape.
Go Paperless
Switching from paper to digital invoices is one of the biggest improvements that can be made to the accounts payable process. The time and HR cost of manual accounts payable process is huge. Industry Week reports up to 90% cost savings in switching from paper to digital invoices.
This cost difference is impossible to ignore, and business owners need to transition to digital invoices to improve the accounts payable process. While it is impossible to completely switch to digital invoices, effort can be made to minimize the amount of paper involved. Many vendors today offer digital invoices as an option which should be promptly availed.
Optimize Through Automation
Repetitive processes such as data entry can easily be automated today. Automation reduces the time and cost of manual entry, allowing the accounts payable department to focus on more important tasks such as processing payments. Manual data entry is also prone to error, with Marketwatch reporting that 88% of spreadsheets have some errors present in them.
Error in the accounts payable process can cost the business dearly. Automation is a good solution to this problem, with AI-based data entry allowing for large amounts of data to be processed quickly and accurately.
Improve Invoice Tracking
Invoice tracking is an integral part of the accounts payable process. Losing track of an invoice can lead to defaulting on your payments, which costs the business money and negatively impacts relations with the vendor. The best way to address this issue is by automating the process and moving to digital invoices.
This is not always possible; however, paper invoices will still have to be used to some extent. In such cases, storing the paper invoices digitally and maintaining a database of all such invoices through automation can solve the issue.
Reduce Invoices
Reducing the number of invoices that need to be processed is a great way to optimize accounts payable process. This does not imply that the business must spend less, but rather that invoices should be reserved for purchases that require them. Small purchases generate invoices too, which take time and money to process. These insignificant invoices can be cut from the process entirely by switching to a business credit card for small purchases. If done right, the load on the accounts payable department can be greatly reduced and the business may avail benefits from using the card.
Stop Using Checks
Checks are a major roadblock in the accounts payable process. Checks cost ink and paper and take time to process and once a check is sent, the business loses control of it. If it gets lost in the mail or delayed, the payment may end up late and cost the business late fees. Electronic payments meanwhile are processed instantly in most cases, with larger payments taking a few days in some cases. Electronic payments are a much quicker and easier way to process payments, and with instantly generated receipts the business has proof of timely payments.
Set Reminders
In the daily hustle and bustle of business, it is easy to forget that a payment is due. One way to address this simple problem is to adopt the use of reminders in the business. By training the accounts payable team to maintain a shared reminder for payment due dates, it becomes easier to stay on top of things and avoid late payment penalties. This is a simple accounts payable process improvement which can have a positive impact on your business.
Create a Payment Schedule
Instead of processing payments as the due dates get near, create a payment schedule. For example, reserve the 15th and 30th of every month for payments due in that time frame. By creating a consistent schedule of payments, the vendors will know when to expect their payment and instead of single payments across the month, all payments can be processed in bulk in one day. This is another simple yet effective method to achieve accounts payable process optimization.
Be Prepared For The Worst
Businesses have their good days and bad days, and intelligent entrepreneurs put measures in place to help the business through tough times. One such measure is setting up an emergency fund for the business. As with personal finances, a business emergency fund allows the business to fulfil its obligations even in tough times. Therefore, it is wise to collect excess funds into an emergency reserve. A healthy reserve can ensure that the accounts payable department can operate smoothly and cashflow suffers as little disturbance as possible in troubled times.
Invest In New Technology And Ideas
Technology is one of the best engines for driving accounts payable process optimization, with the importance of AI and digital processing well emphasized already. Beyond software and electronics, another area worth investing in is new ideas.
One such new idea is outsourcing your accounts payable function. Outsourcing refers to delegating the responsibility for a function of the business to a third-party service provider. While the business may invest time and resources on in-house accounts payable process improvements, another option is to let a dedicated and specialized firm handle the function at a fraction of the cost. A good example to illustrate the power of outsourcing are Expertise Accelerated’s accounts payable solutions, which leverage quality offshore resources to provide a top-notch accounts payable processing function at just 40% of the US cost.