Managing Accounts Payables is equally important as managing the Accounts receivables. The payments that you owe to your vendors for the goods or services received should be paid on time. Making early payments will get you discounts and help to maintain a good relationship with the vendor. You should treat your vendors and suppliers like your customers. Having a good relationship with vendors can be a great strength to your business. This comes with various benefits like accepting orders on short notice. As you make early payments, vendors prioritize you as a valuable client and get motivated to accept orders so you will never run out of supplies.
What is Accounts Payable?
Accounts payable (AP) refers to the amount you owe to your suppliers or vendors for purchasing goods or services on credit. Making these payments on time is crucial for managing the cash flow of a business. AP and AR should be properly balanced and maintained to avoid any shortfall. The department in an organization that handles these payments is also called Accounts payables.
The accounts payable process ensures accurate and timely payments to vendors or suppliers that extended credit for your business. All the invoices should be accurately tracked and recorded by the AP department. These payments should be verified and approved by the management and should be paid at the right time according to payment terms. Delays in the payment can affect the credibility and goodwill of the business. You will even miss out on the discounts and benefits suppliers offers for making an early payment. Streamlining your AP process will also help you maintain a better relationship with your suppliers or vendors.
Common Accounts Payable Process Challenges
If the payments are getting delayed, the suppliers might send you a copy of your existing invoice. This might cause confusion and the chances of making the payment twice for the same invoice are high. This can affect your cash flow badly. If you fail to sort out the duplicate payment from your records, your money will be long lost.
Delays in payment approval
Manual AP processing is often time-consuming. The internal process should be efficient to track the invoices and approve the payments. You might end up losing the discounts or benefits for making an early payment. The internal process should be streamlined to get avoid any delays or errors.
Mismanagement of invoices
Keeping track of your invoices is one of the prime tasks when it comes AP process. The chances of losing track of your invoices are very high if you receive a large number of invoices from multiple vendors. If you are unaware of losing an invoice, you will only get to know when the supplier is demanding payment.
Missing purchase orders
Raise purchase orders according to the demand for the supplies. There should not be any unauthorized purchases or duplicate orders from the suppliers. Missing purchase order makes it hard to track what you’ve ordered. The mismatch in the amount can affect the budget and you might end up with supplies that are not necessary.
Problems with suppliers
You should maintain a good relationship with your suppliers. Making payments within the time agreed will always make the suppliers happy. This builds a good relationship with the supplier and helps you be their valued customer. It might help you get a flexible payment term or get an order on short notice.
Managing paper invoices can be hard to manage. AP process generates at least two documents per purchase which include purchase order and vendor invoice. The number of purchases will increase as your business grows. You will find it hard to store these documents and it gets even harder to track them. Retrieving these documents in the future might cause trouble as you are trying to find a specific invoice on a pile of similar other invoices.
Best Practices for Accounts Payable Process
Digitization allows you to store all your documents digitally. It helps you eliminate problems with paper-based filing and storing all your paper documents manually. You could request digital invoices from the vendor or scan the invoice and store it in the cloud. It makes it easier to track and retrieve than paper documents.
Make sure that your vendors are efficient and reliable. They should accept and deliver your orders quickly. Maintaining a vendor portal where you can record and access all the necessary information regarding the vendor is a good idea. It helps you stay organized and have a better relationship with the vendors.
As accounts payable processing can be complex, streamlining the process will help you save valuable time. It significantly reduces errors and late payments. Companies that operate in multiple locations can implement a centralized system and redirect all the invoices to a single location or head office where invoices can be processed and reported with ease.
The chances for fraud while processing the accounts payable are high. It can be both internal and external. You should be careful while dealing with unfamiliar vendors as it could be a scam. Not only vendors, but you should also look out for employee fraud. Making changes in the data can be a huge threat for a business. To avoid this, proper control should be implemented all over the process. Duties should be separated and the access must be limited to the right employees.
Prioritize your invoices
Don’t pay the invoices early without any benefits. The invoice should be prioritized and the right time to make payments should be determined based on payment terms. It will help you optimize your account payable and improve your cash flow to avoid any cash crunches. Be aware of the early payment discounts if your suppliers offer any so you can save up some cash.
Set goals and track them
Scaling the performance of your operations is an essential part of how well your business is doing. You should set quantifiable goals and KPIs to measure your process. You could assess the performance along the process and make changes accordingly. Major key points to scale in AP include cost per invoice, days payable outstanding, early payment capture rate, etc.
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