Every successful business is constantly finding means to enhance its internal processes. Optimizing accounts payable boosts your operations’ efficiency and effectiveness, promotes reliable financial reporting, and ensures laws and regulations compliance. It also positions your company for better liquidity, yields more profits, and alleviates funding gaps. Failure to optimize your accounts payable can significantly impact your company’s income. It keeps the business from making prompt payments, leveraging available discounts, and negotiating with suppliers.
Accounts payable management can be time-consuming and overwhelming. However, implementing the right strategies can help minimize late and missed payments, cost per invoice, and invoice backlog, and improve employee morale while giving you more control, enhanced reporting, and visibility. This post discusses eight accounts payable best practices every successful company should implement.
Table of Contents
- Leverage Accounts Payable Automation Software
- Focus on Invoice Matching
- Reconcile Accounts Payable Regularly
- Establish Effective Internal Controls
- Learn How to Renegotiate Payment Terms
- Embrace Ongoing Accounts Payable Reporting
- Prepare a Schedule of Accounts Payable
- Ensure an Effective Accounts Payable Audit
Leverage Accounts Payable Automation Software
A manual accounts payable process has many challenges, including inefficient processes and manual data entry, missing or lost invoices, conflicting accounts payable methods throughout the company, duplicate payments or invoices, inadequate or outdated technology, security and fraud issues, a decentralized accounts payable process, and more. Automating your accounts payable procedures yield visible outcomes and bottom-line improvements.
Why Automate Accounts Payable
Improved Visibility
Automating accounts payable offers your business improved visibility into its invoice processing. It eliminates the paper-based manual invoicing approach and builds a streamlined process. Automated accounts payable allow your company a clear invoice view and show you where payments go. This enhances transparency and promotes informed decision-making.
Streamlined Processes
Accounts automation software helps businesses streamline their invoicing processes, making dealing with all financial transactions easier. It also saves money and time and reduces manual tasks and human error. Accounts payable automation lowers invoice processing turnaround time, ensuring faster vendor payments and improved accuracy during payment reconciliation. The streamlined process boosts your accounts payable team’s efficiency and frees valuable resources you can direct elsewhere in the company.
Prevent Payment Fraud
A 2019 payments fraud and control survey shows 82% of companies reported payments fraud incidents. This shows just how prevalent payment fraud has become. Luckily, automating accounts payable gives your business control over the employees that can access invoice approval and payment release.
Focus on Invoice Matching
Invoice matching refers to an automated procedure that accounts payable experts use to ascertain that there aren’t discrepancies between an invoice and a purchase order. The process involves matching details like vendor code, supplier name, purchase order number, quantity, purchase amount, phone number and address, product descriptions and line items, and custom fields.
Invoice Matching Tiers You Should Know About
- Four-way invoice matching: This matching process requires a purchase order, supplier invoice, and receipt of goods. Once these three elements should match within agreed tolerance levels, they’re put into the accounts payable system
- Three-way invoice matching: Like the four-way invoice match, it occurs when invoices are matched with purchase orders, supplier invoices, and goods receipts. The data is then keyed into an accounts payable system
- Two-way invoice matching: This occurs when invoices from third parties are matched with purchase orders, tolerances are achieved, and invoices entered into the database
Reconcile Accounts Payable Regularly
Accounts payable reconciliation involves matching what’s still owed to the suppliers based on the business’s records with what’s recorded in vendor statements, usually when an accounting period ends. It ascertains accurate business finance reporting and timely vendor payments. Reconciling accounts payable also offers vital data for your company to make strategic payment terms and vendor relationship decisions. Tracking credits and payments also allows your business to avoid interest charges and late fees.
How Accounts Payable Reconciliation Benefits Your Business
- Ensures errors are caught quickly and efficiently: Financial reports will be affected if accounting errors go undetected for a long time. Reconciling accounts payable ensures mistakes are caught promptly before wreaking havoc in your accounts department.
- Improved communication with vendors: Reconciling accounts payable helps solidify communication by identifying differences between the amount received and the invoiced amount. It also tracks due dates to prevent delayed or missed payments.
- Prevents fraud: While financial errors may be genuine, others indicate fraud. When you catch mistakes during reconciliation, confirming that those vendors exist and that the prices weren’t exaggerated prevents fraud.
- Safeguard against losses: Accounts payable reconciliation helps ensure no double payments are made. Spotting double payments, possible fraudulent transactions, and other mistakes can save your business unnecessary financial losses.
You can reconcile your accounts payable once each month. Nevertheless, if your business is more prone to fraud or handles many invoices, you can reconcile weekly or daily.
Establish Effective Internal Controls
Internal controls are standard operating procedures organizations use in accounts payable workflows to alleviate human error risks, minimize improper payments, prevent fraud, and ascertain regulatory compliance. internal fraud, duplicate payments, late or missing payments, poor invoice payment visibility, conflict of interest, and absence of an audit trail.
Importance of Accounts Payable Internal Controls
Accounts payable internal controls are essential in ensuring your company payment’s security and safety while mitigating fraud. These controls alleviate risk by establishing a checks and balances system within your Accounts Payable department.
Types of Accounts Payable Internal Controls
Obligation to Pay Controls
These controls enable businesses to verify invoice accuracy and pay for what they’ve received. Purchase order approval, invoice approval, invoice matching, and duplicate auditing are the steps involved in the obligation to pay controls.
Data Entry Controls
After confirming that an invoice requires payment, recording before and after approval ensures the transaction is recorded successfully in your system.
Payment Entry Controls
You must make payments upon invoice approval and entry into the system. If you’re still using manual payment processes and paper checks, consider segregating duties, tracking check numbers, manually checking double signing and signing, securing check storage, and updating vendor payment details to enhance security.
Learn How to Renegotiate Payment Terms
Renegotiating payment terms with vendors means keeping more money in your company and enhancing liquidity to cater to operating expenses while avoiding seeking loans or being overdrawn. Good cash flow also implies an improved credit rating.
How to Renegotiate Your Payment Terms
Know Who to Negotiate With
Renegotiating with all suppliers at once can be distracting and time-consuming, shifting your focus from business. You can prioritize the vendors depending on how much money to spend with them. If you spend a considerable amount with one supplier, you’ll be better positioned to negotiate new payments.
Understand Your Current Terms
You need a baseline from where to start negotiating to negotiate for new terms. Analyze your supplier contract to understand each detail. This will give you good ground from which to argue your case.
Ensure Your Proposal Benefits Both Sides
An excellent relationship with your vendor gives you a hedge for renegotiating your terms. However, you’re highly likely to get what you want if you offer something beneficial to them. For instance, if the freed cash flow lets you raise your sales, you can increase the vendor’s order volume on your next purchase.
Talk to the Right Person
When negotiating payment terms, someone other than the salesperson might be the perfect person to talk to. You negotiate with the sales manager, head of finance, or any other person in charge of payments.
Organize a Formal Meeting
Scheduling a formal meeting with a relevant party from the supplier company is vital. Go prepared with a summary of the current contract terms and what you’d like to change. Remember to include what you’re offering in exchange.
Embrace Ongoing Accounts Payable Reporting
Accounts payable reporting records and tracks business transactions to ensure accurate, up-to-date financial data. It lets your company monitor its credit spending while ensuring timely bill payments. Accounts payable reporting ensures your business has the data it’ll require for the tax season, making it easier to cooperate with the accounting department and meet tax filing deadlines.
It also helps maintain positive vendor relationships, resulting in favorable payment terms and money-saving opportunities through early payment discounts. With accounts payable reporting, you can ascertain your financial data’s accuracy to help measure your working capital, and identify the invoice payments that should be made, and document problems as they arise.
Classes of Accounts Payable Reports
Accounts Payable Aging Report
This report summarizes the invoices and bills your company owes, graded by the due date and vendor. Comprehensive accounts payable reports showcase invoices with due dates, reference numbers, balance due, and payment terms. To understand accounts payable reports, you must know the amount your company owes the trade creditors, early payment discounts provided, payment terms meaning, and when invoices are past due or due.
Voucher Activity Report
A voucher activity report monitors your payment vouchers over a particular period to help you see how much the company spends on various departments or specific projects. The report should include a vendor’s name, the business’s purchase order, the due date, the amount due, and discounts provided.
Accounts Payable Trial Balance
An accounts payable trial balance is an end balance listed in the chart of accounts and consists of unpaid and partially paid invoice subtotals on every general ledger account. The report ascertains that your company’s debt matches its credits and every journal entry is accurate. This trial balance evaluates all balances to verify that they complement the total amount due.
Payment History Report
The report records a specific accounting period’s expenditures, usually classified by category or vendor. Based on the report’s structure, it can provide a spending summary view by category or each payment’s detailed list. Payment history helps compare actual spending with monthly forecasts and annual budgets. Monitoring actual expenditures and budgeted expenses notifies your business of possible cash shortfalls to avoid financial strain in the future.
Vendor Analysis Report
Vendor analysis reports let you see all the payments your business made to the vendor, making it easy to view what has been paid to every vendor. The report comes in handy when making end-year reports, renegotiating payment terms or pricing with vendors, and spotting possible overspending.
Best practices for accounts payable reporting include maintaining proper internal records, managing the payment cycle, regularly reviewing accounts payable, and utilizing accounts payable automation to generate more accurate reports.
Prepare a Schedule of Accounts Payable
A schedule of accounts payable is a list of all vendors in your accounts payable ledger that your business owes and other current account balances. The plan allows the accounts payable department and managers to monitor and arrange the supplier accounts that should be paid. It outlines bills’ due dates and when supplier payments should be made. In some scenarios, you can set payment terms.
In these cases, you can pay your vendors weekly because it’s likely to resonate with many account settlement durations, usually seven, 14, 21, and 30 days. With a clear payments and due dates schedule, your company can prevent late or missed payment fees, safeguarding your relationships with vendors and business reputation. Consistent account payment schedules help establish trust with vendors because they’re guaranteed when to expect payments.
Ensure an Effective Accounts Payable Audit
An accounts payable audit independently assesses your accounts payable, financial data. It evaluates how your accounts payable transactions are recorded and whether that represents a correct view of your organization’s operations. The primary method for auditing your accounts payable is matching general ledger activities to the general ledger figures.
During the audit, your auditor will look for completeness, validity, accuracy, proper disclosure, and records compliance to ascertain that the company’s records are an accurate view of your business. The audit helps develop a successful internal control system in four different stages.
Accounts Payable Audit Stages
Four audit trail stages are involved in developing the most successful internal control system. They include:
- Planning the audit: This is the first step of your accounts payable audit. Your company will get audit notifications then a meeting will be organized to talk about the standard operating procedures
- Conducting fieldwork: The auditor takes time to go through financial records, including the balance sheet, purchase orders, check register, general ledger, and vendor invoices
- Final audit report: After the fieldwork is done, the output is in a final report summarizing the auditor’s results and their evaluation
- Follow-up analysis: A follow-up review comes next to ensure all the suggestions have been achieved and the desired results attained
Conclusion
Accounts payable optimization enhances your operations efficiency and effectiveness, prevents missed and late payments, and promotes reliable financial reporting. It also helps develop good customer relationships, prevent fraud and associated losses, and ensure accurate financial reporting. Implementing these best practices helps ascertain a streamlined accounts payable department and an improved bottom line.
