How the Accounts Payable Process Work?

The accounts payable process is a key part of any successful business. It ensures that the business meets its financial obligations in full and on time. The AP team must also find creative solutions for instances when cash is low to meet these needs. Understanding the accounts payable process steps makes it easier for you to identify inefficiencies and take corrective actions.

What Is Upstream vs Downstream Accounts Payable Workflow?

Upstream accounts payable processes refer to all purchase activities that occur before the business places an order. This includes procurement activities, such as choosing the right vendors and suppliers. Note that, sometimes, you need to create the best suppliers or vendors via strategic relationships. A separate team handles this task, but it has a strong impact on the work of the accounts payable team.

Downstream accounts payable operations refer to everything that occurs after the company places an order or buys the item. This is the part of the AP process actually handled by the accounts payable team. It begins with the purchase order and ends when the AP team records payment of the transaction.

What Are the Full Cycle Accounts Payable Steps?

The full cycle of accounts payable includes all the steps of invoice management and payment. Companies can either complete this process in-house or outsource it to a third-party provider.

1. Purchase Order Creation

The purchase order authorizes a vendor to provide goods or services to a company. It details the terms of the transaction, including the price, quantity, and delivery date. The company’s accounting system or team creates the PO and sends it to the vendor.

2. Receipt of Goods or Services

Once the goods or services have been delivered, the vendor sends an invoice to the company. The invoice should match the purchase order in terms of price, quantity, and delivery date.

3. Invoice Receipt

The company must review the invoice and verify accuracy. After this, the AP team submits the invoice for approval. The approver will double check to make sure that the company received the goods or services and that the price is correct.

4. Invoice Payment

The AP team then determines the method of payment and how much money is available to pay the invoice. Once authorized, the team or the software in use submits payment to the vendor.

5. Payment Record

The final step in the accounts payable process is invoice recording. This requires an entry in the company’s financial system, physical books or both. Maintaining strong records ensures that you can track spending.

What Are Some of the Challenges of Traditional Accounts Payable Workflow?

Accounts payable plays a crucial role in ensuring the proper management of cash flow. However, manually handling this task leads to its fair share of inefficiencies.

Approval Inefficiencies

When companies don’t approve invoices in a timely manner, it can cause delays in payments. This, in turn, can lead to late fees and interest charges. It can also damage supplier relationships.

Inefficient Data Management

This can lead to the lack of visibility for invoice payments and the potential for missed opportunities and increased costs. It can also lead to security breaches and lost files.

Duplicated Entries

Another common issue with traditional accounts payable processes is the duplication of entries. This can lead to mistakes and lost time when trying to reconcile payments. It can also create cash flow problems if duplicate payments either caused or were caused by the duplicated entries.

Payment Timing Challenges

The payment timing challenges associated with traditional accounts payable processes can lead to cash flow issues. When the AP team doesn’t make payments in a timely manner, it can cause suppliers to delay shipments and disrupt operations.

What Are Some of the Solutions to Invoice Processing Cycle Challenges?

When it comes to resolving the issues inherent in the traditional accounts payable payment process, most solutions fall under two main headers. The first is establishing policies that create a proper protocol, as well as checks and balances. Second in line is leveraging technology to reduce human error and streamline the process.

Automated Approval

Automating invoice approvals can speed up approvals and ensure the team completes this in a timely manner. This can help improve supplier relationships and avoid late fees. In fact, the AP team can automate all three accounts payable process steps.

Efficient Data Management

Good data management can help reduce the chances of duplicate entries and improve visibility for invoice payments. It can also reduce the time spent on reconciling accounts and balancing the books.

The Three-Way Match

This involves matching the purchase order, receipt, and invoice to ensure that they all agree with each other. If the AP team notices any deviations, no matter how small, they should query this before moving forward with requesting invoice approval.

Regular Audits

Automation reduces errors, but it doesn’t completely eliminate them. That’s because automation is only as good as the information received and errors can exist in the data. Regular audits ensure the AP team or financial controller catches errors before they become a problem.

What Are the Benefits of Using Technology to Automate the Invoice Processing Cycle?

Automation is one of the single most significant steps managers can take toward improving efficiency and productivity. Consider these examples of automation benefits:

  • Reduced processing time
  • Fewer errors
  • Improved data management
  • Easier reconciliation of payments
  • Real-time updates
  • Faster payment to suppliers

Leveraging technology frees up time for the AP team to focus on more value-added tasks. This can improve efficiency and help the company save money. Digitizing the process also reduces information silos in the finance department.

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