Too many businesses lag behind when it comes to their accounts payable process. It’s maybe not the best way or the smartest way. It’s just the way things have always been done.
But when it comes to accounts payable, arcane processes do companies no favors in terms of efficiency. In fact, it’s more than likely costing them money.
The good news is that there are proven ways to improve one’s accounts payable process. Join us as we run through modern AP, identify some best practices to be sure you’re following, and show how next-level strategies, such as automation, can take your accounts payable process to the next level.
Defining Modern Accounts Payable
So what does accounts payable look like in 2020? Here are a few basics about the field today.
The Importance of Accounts Payable (and Accounts Receivable)
When it comes to the importance of accounts payable, it’s pretty simple: Having good AP specialists or department can keep the lights on for a company.
Accounts payable departments are generally responsible for paying a company’s bills for goods or services with vendors, suppliers, and independent contractors. Businesses that continually pay vendor or supplier bills late incur late fees, create problems with vendors, affect credit ratings, and lead, if unchecked long enough, to insolvency.
It’s not a particularly lucrative field at first glance, with the United States Bureau of Labor Statistics reporting the average pay for bookkeepers, accountants, and auditing clerks at $41,230 in 2019. But the accounts payable position is expected to transform with automation and expand duties with more value-added functions.
Same goes for accounts receivable, incidentally, which is responsible for verifying, tracking, and receiving every payment due to the company. Just as a good AP clerk makes sure it’s company isn’t facing undue liability for neglecting to pay vendors, competent AR staff ensures unscrupulous customers aren’t skating by without payment.
How Accounts Payable Typically Functions
Accounts payable is, possibly always has been, and always will be about making sure that vendor bills are processed, approved, and paid on time. But the process has also changed a lot in recent years, what with the rise of the internet, automation and mobile computing. These days, invoice approvals can happen anytime and anywhere in world thanks to digital technologies and — provided a company is doing a few key things — it should happen reasonably quickly.
Here’s how the accounts payable process typically functions:
- An invoice comes into a business (accounts payable department), often from a vendor or independent;
- Someone, often an accounts payable specialist or, at smaller firms, a business owner or accountant, captures data from the invoice, inputting it into an accounting system;
- The accounts payable clerk gathers documentation proving that the goods or services were purchased by the business;
- Then the AP clerk gathers the documentation and takes it to an invoice approver, usually within another department, and sometimes additional sign off is required when the invoice reaches a dollar threshold by a Controller, VP of Finance, Chief Financial Officer, or business owner, for final review;
- Once the invoice has been approved and money has been deposited into a business account, the invoice is marked as paid in their financial system.
Where the process can get bogged down is by relying on human action excessively through these steps such as manually coding invoices and physically chasing invoice approvals, or even using long email chains to obtain approval which lacks context given the decentralized approach. In the year 2020, as we’ll see in a bit, many of these steps can be automated and performed by intelligent machine learning systems, though some companies still loathe for change.
How Modern Accounts Payable Has Changed Things
In short, accounts payable work keeps becoming faster and more digitized. The industry is also shifting away from paper-based processes, partly because technology now allows for this and partly because the risks of sticking strictly with paper for invoice processing and payments is not worth the potentially negative business results.
As the Association for Financial Professionals notes, “It’s extremely difficult to stop money leaks in a paper-based or even a partially automated system.”
It’s all about the role of the modern accounts payable process, which is as much about paying bills as it is monitoring for fraud, performing high-level data analysis, and staying in contact better than ever with vendors and suppliers.
5 Best Practices for Your Accounts Payable Department
The average accounts payable department can be a maze, with hundreds if not thousands of invoices processed every month.
Here are five best practices to ensure the accounts payable process runs smoothly.
1. Know Your Invoice Approvers (and When to Go to Them)
Invoices can take weeks to approve. Some of the big reasons for this include: manual processes, inconsistent approval processes, and where and how to seek out invoice approvers within your company
For this reason, it’s wise to keep clear records on exactly which personnel must authorize or approver invoices and for which departments and invoice amounts. Moreover, in which order invoice approvals are to be made. This should also include exception handling, say, for when an approver is out of office, on leave, or has left the company.
Knowing when to go to your invoice approvers matters, too, with Accounting Tools noting the importance of payables staff assembling a packet of supporting documentation, using a signature block to stamp the invoice, and then having an approver do a review. The site notes, “this approach gives reviewers a very complete set of information to work with” and better yet, AP Automation systems have this built-in.
2. Track Every Invoice Payment Due Date
As mentioned earlier, many businesses pay hundreds, if not thousands of invoices each month. Without a way to track every deadline that looms, there’s no way businesses would be able to keep up with every payment that must be made. That goes for both hard deadlines and the early payment deadlines that typically spur discounts for companies (often 2 percent for paying within 30 days, according to one small business website.)
It also matters how the tracking is done. Having someone manually check every deadline can quickly spin out of control, consuming vast amounts of employee time and resources. Thankfully, cloud-based software and other solutions now exist that can remind invoice approvers, AP specialists, Controllers, and others when to approve invoices and when payments are due.
3. Know When to Use Small and Large Batches of Invoices
There can be a temptation, particularly for accounts payable specialists, to get into a groove and process and pay as many invoices as possible in one sitting. Some companies might also emphasize this, to limit AP staffing. That said, it’s smart to know when to work with small and large batches of invoices.
Essentially, small batches are ideal when performing captures — that is, taking information from an invoice and manually inputting it into a company’s accounting, payable, purchase control, or similarly-named system. Data entry can be a hated task for AP folks. Breaking it up into small amounts limits the potential for errors or leverage automation for invoice capture as we’ll cover in the 2020 and Beyond section below.
On the other hand, it can be costly to do check runs. Therefore, synchronizing as many payments as possible into larger batches makes sense. It’s why companies will sometimes have specific dates or times of the week that they cut checks.
It’s also wise to leverage technologies that can support painless paper checks which automate the signing, printing, and mailing of checks. This in addition to ACH payments that support batch ACH processing with individual transaction reconciliations in your bank statement.
4. Centralize Payments
Aside from organizing payments into large batches, relegating them to a central part of your company is wise as well. This ensures that a single authority within your business is responsible for every payment going out. Then assigning one person the ability to change vendor payment details is another controls measure. Both of which help ensure that payments aren’t being processed haphazardly, with the potential for fraudulent or phony invoices lessened as well.
There’s a caveat of course: While centralized payment departments or areas of your company are wise, businesses will want to make sure that there is more than a single employee responsible for payments. Putting too much on a single person can lead to bad outcomes, such as fraud. It’s a best practice to enforce internal controls such as ensuring the same person that can edit vendor payment details doesn’t have the ability to process payments. This in addition to daily bank reconciliations, surprise audits, and job rotation among others.
5. Use Spend Management Tools
These days, companies need not force employees to cumbersomely track and process invoices. Spend management tools can help companies analyze and automate every step of the accounts payable process.
2020 and Beyond: Using Automation and Other Tools to Make Your Accounts Payable Process Even Better
It goes without saying that in 2020, optimal accounts payable operations no longer simply revolve around implementing best practices and quality controls, it’s about leveraging technology. Here are how some of the latest accounts payable trends that are changing the field and helping it evolve into a more efficient and controlled function:
In the old days, accounting was done in a dusty ledger, tucked away in an office. No longer. Cloud computing and software as a service allows accounting to be performed online, which enables quicker operations and greater transparency.
Online accounting can also cut costs, with companies no longer having to develop and maintain pricey internal systems for inputting and processing invoices. If a company so chooses, all of this can be found remotely, safely, and economically these days, with a range of possible service providers available.
Accounts Payable Trends to Watch
In recent years, the digital world has been trending toward greater transparency and accountability. Not surprisingly, this has touched the accounts payable process as well, with one of the latest trends related to data oversight.
As noted earlier, it’s a bad idea to have a single employee handling payments. But guarding against that likely isn’t enough in itself, with Total Retail noting, “The concept of a centralized payments intelligence hub could be a big trend in 2020, where information around fraudulent activity can be shared between organizations.”
Some of the other latest trends relate to increasing amounts of companies automating and employing machine learning to various parts of their accounts payable process.
What to Automate in Your Accounts Payable Process
The big question, so to speak, with the automation revolution currently under way in accounts payable relates to what precisely to automate in your AP processes.
The answer is that any number of different processes can be automated. Four of the best things to automate include:
- Invoice intake, and vendor portal, which can pull invoice data into the accounting system, then reduce anxious emails from vendors or contractors wanting to know that their bill is in the queue;
- GL coding and PO matching, which allows grouping common expenses together and match invoice to open POs;
- Invoice Approvals, with automatic reminders, and invoice context provided on the digital invoice showing all invoice-related actions from changes to the invoice — to invoice communications, questions, and answers. And ability to approve invoices from anywhere, at any time, and on any device.
- Batch processing, with Investopedia noting, “Unlike earlier iterations, the functions of modern batch processing are completely automated to meet certain conditions of time.”
What Your AP Department Will See With Automation
Automation can do a lot of things for accounts payable. Really, though, one of the things it does best is remove bottlenecks, improve controls and visibly, speed operations, and provide a valuable assist to AP staff.
The average accounts payable department remains under pressure to process myriad invoices each month. Even in 2020, this accounts payable definition hasn’t changed that much. But innovations like automation are helping pave the way for a more just — and efficient — accounts payable process. This, and providing accounts payable the opportunity to take on more value-added functions such as streamlining payment processes like in the case of Kiva Confections after they adopted AP Automation.
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