Guide to retail subscription payments
How to Streamline Your Accounts Payable Process
It may not be the most glamorous of topics. But what your accounts payable (AP) process lacks in excitement or entertainment value, it makes up for in importance.
How you manage, verify, process, pay, reconcile, and track invoices is a crucial part of your business. Not just on an operational level, either – but for building and maintaining strong supplier relationships, managing your cash flow, and preventing fraud and overpayment.
So below, we’re walking you through each step of the accounts payable process flow. We’ll cover how it works, why it’s important, and which best practices you can harness to improve yours – as well as how accounts payable differs from similar terms, like trades payable.
Ready to reform and revitalize your accounts payable process – and turn your invoicing and payment processes into a well-oiled machine? Read on.
What are accounts payable?
Accounts payable are the records on your business’s balance sheet for goods or services you’ve received – but have yet to pay for.
Essentially, accounts payable refers to money you owe suppliers, vendors, and creditors – and represents your company’s short term liabilities and unpaid invoices.
Accounts payable can include:
- Electricity and water bills (and other recurring payments)
- Rent and lease payments
- Advertising and marketing expenses
- Travel expenses
- Employee benefits
- Packaging costs
- Insurance premiums
- Employee reimbursements
- Software and technology subscription fees
How you handle your accounts payable process is crucial – because the speed and efficiency with which you meet your obligations to your creditors goes a long way towards maintaining good relationships with vendors and supply chain partners. It’ll also help you keep a better handle on your cash flow, avoid debt cycles, and benefit from more granular financial reporting.
Yet maintaining an accurate and effective accounts payable process comes with its fair share of challenges for businesses. Handling a large volume of invoices from a number of different suppliers can be tricky and time-consuming. And the manual data entry involved opens the door to human error, information security risks and duplicate – or delayed – payments.
What is the accounts payable process?
The accounts payable process is the last step in the P2P (procure to pay) cycle.
It begins when you send a purchase order (PO) to a vendor or supplier to requisition goods or services, and ends after you’ve paid the invoice and updated your business’s own records.
That said, exact definitions as to where the accounts payable process begins and ends differ. Some sources mark the capture of the invoice as the first step in the process – and break the accounts payable process down into four key stages:
- Invoice capture
- Invoice approval
- Payment authorization
- Payment approval
For a full breakdown of how the accounts payable process flow works, read on.
How does the accounts payable process flow work?
A typical accounts payable process looks like this:
- You send a purchase order (PO) to a vendor, supplier, or other supply chain partner to request goods or services.
- You receive the goods or services from that company, along with an invoice.
- Your AP team verifies the invoice is accurate, and that its contents are consistent with the goods or services provided (and the price!). At this stage, you might utilize two- or three-way match strategies – where your team compares the PO, the invoice, and the goods receipt to ensure they’re all the same – to avoid overpaying.
- You enter the invoice’s details into your business’s accounting system.
- You approve the invoice for payment (or gain that approval from the relevant person).
- You pay the creditor – typically through an EFT (Electronic Funds Transfer) payment, such as ACH (Automated Clearing House), wire transfer, or electronic check.
- You enter the payment details into your own system, and update your records to reflect that the invoice has been settled.
Why is the accounts payable process important for cash flow?
Because the accounts payable process governs how – and when – you pay suppliers, it directly impacts your business’s outgoing cash flow. So it’s important to get right.
Some of the ways your accounts payable process can boost your business’s cash flow include:
- Optimizing the timing of your payments to avoid late-payment penalties – and take advantage of early payment incentives.
- Maintaining positive supplier relationships. By paying your creditors on time and for the correct amount, you build trust and rapport – which may, eventually, lead to discounts, preferential treatment, and more favorable credit terms going forward.
- Improving your cash flow forecasting. Well-managed accounts payable processes provide the latest, most relevant data around your outstanding liabilities and payment schedules. This is crucial when it comes to more accurate forecasting: allowing you to anticipate your cash needs and make decisions informed by data, not hunches.
- Reducing your financial risk. A good accounts payable process alleviates the risk of errors, duplicate payments, and fraud – all of which can harm your business’s cash flow.
How to track your accounts payable process
We’ve covered why a robust accounts payable process is important. But to ensure its efficiency and accuracy, you’ll need to track your accounts payable process – and this means measuring it against some key performance indicators (KPIs) and metrics.Here
Some accounts payable metrics you can keep an eye on include:
- Number of invoices received
- Percentage of digital invoices
- Percentage of ‘straight-through’ invoices (those that progress throughout the system without delay or exceptions)
- Average payment processing time (the length of the period from which the invoice is received to when payment is made)
- Number of payment errors
- Percentage of discounts captured (and how much money it saved you)
- Number of vendor disputes
- Number of late payments
- Average cost per invoice (this takes into account the outlay for your staff and software, and any transaction fees you incur in the payment processing flow)
These KPIs can help your business get to grips with any systemic bottlenecks slowing down the system, and root out any recurring reasons for incorrect or late payments. They can also help you save money by capitalizing on early payment discounts, and giving you a more comprehensive understanding of how much each invoice is costing you to process and pay.
The difference between trade payables and accounts payable
The term trade payables refers to the money you owe suppliers or vendors for trade-related purchases made on credit. Trade-related purchases include:
- Raw materials
- Goods for resale
- Business supplies
Basically, trade payables are any funds you owe for goods or materials that arise from your company’s core operations (your regular trade).
The term accounts payable, on the other hand, encompasses all your business’s short-term debts – trade payables among them.
Accounts payable, as we’ve discussed, are the accrued debts and obligations your company occurs in the course of doing business on a day-to-day basis.
The difference between trade payables and accounts receivable
We’ve already defined trade payables – money you owe to suppliers for goods or materials (like inventory) your company needs to conduct its key activities – and accounts payable.
So what about accounts receivable?
The easiest way to think about accounts receivable is as the opposite of accounts payable.
Rather than money your business owes suppliers or vendors, accounts receivable refers to the money owed to you. It’s any and all funds owed by customers to your company for goods or services provided on credit, that they haven’t yet paid for. (So, for example, when you offer your customers the ability to pay in installments; or operate on a subscription payment model, in which your subscribers pay in arrears.)
What are the best practices in accounts payable process flow?
We’ve covered the steps of the accounts payable process flow. But how can you maximize the efficiency and accuracy of your efforts at each stage of the journey?
To streamline your accounts payable process:
- Standardize your processes: by utilizing a standardized coding system and chart of accounts, you’ll ensure you’re categorizing and tracking expenses consistently.
- Detect and prevent fraud: set up alerts and monitoring systems to identify suspicious transactions or red flags early on. Implementing an in-depth invoice verification process (like three-way matching) can also prevent and root out fraud.
- Train your staff: educate your accounts payable team in the latest trends and techniques around fraud prevention, compliance, and emerging industry best practices.
- Automate and optimize invoice reconciliation: utilize accounts payable automation software to reduce the manual workload involved in matching invoices with POs and goods receipts.
- Continue monitoring and measuring: regularly review your accounts payable process flow, and weigh it up against the KPIs and metrics we outlined above. Seek feedback from staff and stakeholders around how you can improve the accounts payable process – and implement this ongoing.
Optimize your payments with Checkout.com
The last (and perhaps most obvious) thing we should mention about accounts payable?
You have to pay them. And to do this, you need a reliable partner: a forward-thinking payment service provider like Checkout.com.
We’re well versed in equipping ecommerce businesses with all the tools they need to automate online payment processing – and offer a suite of payment processing services to help your business do just that.
For example, our straight-through processing (STP) solution helps you dodge the multiple steps involved in transaction processing – such as data entry, verification, and reconciliation – and avoid the associated costs, errors, and delays. While our comprehensive array of tech and tools can help your business reduce churn, and streamline not only your accounts payable process – but every aspect of how you initiate, receive, and manage your payments.
Want to learn more?
Get in touch with the team here at Checkout.com for the full lowdown – and to find out how a refreshing, friction-free accounts payable process flow might be just around the corner.
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