Optimizing of accounts payable processes can enhance the accuracy of your cash flow forecasts, improve liquidity, mitigate potential funding gaps, and realize higher profits as it increases the efficiency and effectiveness of operations, facilitates reliable financial reporting, and ensures compliance with laws and regulations.
Traditionally, accounts payable management was mainly done by delaying supplier payments in order to free up cash flow. However, with the advent of digital technologies companies need to adopt a new set of best practices to obtain more value from the accounts payable function.
This document details some best practice strategies and activities that companies can apply to achieve effective accounts payable management. These strategies are not a one-size-fits-all solution but are general guidelines that each company can customize to meet the specific needs of its business to free up working capital.
- BEST PRACTICE STRATEGIES
Centralizing Accounts Payable
Centralizing accounts payable processes and reporting by establishing a shared services function will ensure that all accounting personnel adhere to common practices and standards. In addition, the company is better able to measure performance against established metrics as well as accomplish more activities with fewer resources and within a shorter timeframe thereby saving on costs. Centralizing accounts payable and reporting helps eliminate redundancies, errors, and duplication of work.
Automating Accounts Payable Processes
Automating your accounts payable systems will streamline the approval process and create more timely payments. The automated system should enable you communicate electronically with vendors and customers and automatically generate purchase orders (POs) for each new order, electronically validate and accept invoices, approve requisitions, track goods received, resolve disputes, and pay invoices on a timely basis. This makes workflows quick and efficient and the accounts payable process has a much higher chance of succeeding.
Adopting Robust Governance Practices
Strong governance practices will reduce the risk of manual errors and strengthen internal controls around accounts payable processing.
To manage cash flows more efficiently and identify issues with vendors or accounts payable processes, ensure that accounting personnel are meeting standard operating procedures; keeping track of vendor terms, clauses, and agreements; maintaining scorecards of the performance of the vendors; and monitoring data about incoming invoices, payments made, services and products received etc.
Setting up Supplier Portals
Supplier portals will electronically track the status of orders, delivery schedules, potential product shortages and payments received. Using supplier portals will lead to reduction in manual errors, improved order accuracy, and convenience for vendors/suppliers.
Creating Management Workflows
Manual approval processes can lead to errors, misplacing of documents, and lost opportunities for early payment discounts. Management workflows therefore simplify transactions and enhance efficiency of the accounts payable function by quickly processing incoming invoices and issuing payments more effectively; empowering account payable staff to make better decisions in less time; identifying and resolving system bottlenecks; and streamlining process handoffs to improve liquidity management in the most effective manner possible.
Strengthening the Purchasing Approval Process
It is important to define the levels of authority when it comes to approval of purchases, depending on price and/or quantity. This will strengthen the purchase approval process and create collaboration between the purchasing and accounts payable functions.
- BEST PRACTICE ACTIVITIES
Streamlining the Vendor Management Process
It is important to have processes for supplier evaluation, selection, and onboarding, as well as supplier information management. These processes should be automated such that potential vendors can enter their information and bids for consideration; supplier performance standards can be tracked; and complete and accurate supplier lists and data are available on demand in real time.
Setting up Supplier Master Data
Once you have contracted a supplier, it is important to capture and maintain their data in your purchases and payables system. When you set up a supplier master data, accounts payable function will be able to determine which suppliers have been approved and ensure that they meet the compliance requirements.
To maintain the accuracy and reliability of the supplier master data;
- Ensure controls are in place for registration of suppliers to help reduce the risk of fraud.
- Ensure all data such as product/service details, quality standards, delivery timelines, supplier responsibilities, and any regulatory compliance mandates that apply are accurately reflected.
- Regularly monitor the system to keep the data accurate and complete.
- Update payment terms and the availability of volume discounts, trade credits or other ongoing or periodic rebates.
- If supplier contractual terms change or are renegotiated, the supplier master data must also be updated.
- Properly store your supplier contracts.
Contract Management Process
Centralized and automated contract management processes will prevent inaccurate or fraudulent supplier billing practices that may result in overpayment or duplicate payment. The following activities are therefore essential:
- Cloud-based or digital storage of all supplier contracts.
- Regular analysis of supplier performance and compliance data to improve your contract negotiation strength and secure better payment terms.
- Ensuring your own terms and conditions include transfer of applicable penalties and fees to suppliers who fail to meet the terms of the agreement.
- Regular review of all vendor contracts to identify opportunities for renegotiation, strategic partnerships, and special programs.
- Automatic population of contract data, including pricing, terms and conditions, due dates, quality standards, etc. in to relevant documents (e.g., purchase orders).
Optimizing the Procurement Process
Proper procurement processes prevent the risk of over-spending or trading with unapproved suppliers. It is therefore necessary to track your business’ buying practices to ensure procurement personnel work with pre-approved suppliers and stay within authorized spending limits.
Automation of the procurement process will ensure that:
- New purchase orders (POs) are issued and tracked for each purchase made.
- All procurement and accounts payable metrics are tracked and used to refine performance further.
- All opportunities for early payment discounts, volume rebates, etc. are thoroughly analyzed for optimal utility.
- All payables outstanding are tracked by supplier and associated payment terms.
Optimizing Invoice Processing
Optimizing invoice processing is another opportunity to preserve or improve the liquidity of your business. Important activities will include:
- Having a centralized function for processing invoices to ensure a standardized and consistent approach.
- Checking and matching all invoices and returning those with inaccurate or incomplete data to the vendor for revision before payment.
- Timely processing of invoices as per internal Service Level Agreements (SLAs). Include a date stamp.
- Avoid paying invoices early, without compromising on the relationship with the supplier. Pay invoices only when they are due.
- Pay from original invoices rather than paying from copies to avoid double payment of the same invoices.
- Review your business’ accounts payable aging list/report to determine proper actions for follow-up and write-off.
- Implement Electronic Data Interchange (EDI) systems so that suppliers can submit invoices electronically and you can track invoices against their associated POs, validate and approve payments and maintain accurate payment records.
- Ensure there is separation of duties such that different individuals in your accounts team approve purchases, receive ordered supplies, make payments and handle reconciliations.
- Develop contingencies to reduce or eliminate bottlenecks and consider automatic payment for verified invoices that meet parameters you set for price and invoice type.
Optimizing the Accounting and Reporting Process
To properly manage your accounts payable you need accounting reports and financial records that are up-to-date and accurately reflect current accounts payable balances. This will provide information on how much, how often and when the business pays its suppliers; and enable you choose the most advantageous payment terms and appropriate timing in which to pay suppliers.
To optimize the accounting and reporting process you would need to:
- Properly track all payments made.
- Validate supplier invoices against contract terms and their associated POs to ensure billing accuracy.
- Integrate your accounting software with the procurement system to ensure all payments are accurately recorded across departments on the day they are made.
- Post journal entries before reporting period cut-off dates.
- Centralize and automate all tasks where possible including reconciliations and matching of invoices.
- Have the same individuals prepare and review all reconciliations to reduce the likelihood of overpayment or duplicate payments.
- Follow up on and resolve unreconciled items on a timely basis.
- Choose payment methods with the lowest associated bank charges.
