It operates behind the scenes, but your accounts payable (AP) function has the potential to become a major player in the ongoing growth, profitability, and competitive strength of your business. Traditionally, accounts payable management has been focused primarily on freeing up cash flow through making payments as late as reasonably possible. But the changing face of global business, and the advent of advanced digital transformation technologies, means companies serious about capturing more value from the accounts payable department have the chance to do so by adopting a new set of best practices.
Why Accounts Payable Management Matters
Every company, big or small, needs to pay their bills, many of which are classified as short-term liabilities (current liabilities) on the balance sheet—i.e., accounts payable.
The accounts payable process itself and accounts payable management have both long been focused on making sure those bills get paid without choking cash flow. Doing so helps ensure sufficient liquidity to fund investment opportunities, product innovation, and process optimization that can reduce your ongoing costs.
In support of these goals, effective accounts payable management seeks to establish, implement, and enforce practices that support the primary goal of accounts payable: managing trade credit purchases while carefully balancing due dates and supplier goodwill against the company’s need to keep working capital free.
Finding ways to optimize your accounts payable management provides significant benefits, particularly for small business owners who rely on working capital more heavily than large businesses do.
- Efficient and accurate workflows in your accounts payable system provide transparency and accuracy in the cash flow tracking and planning.
- Better cash flow management enables more accurate budgeting.
- Effective accounts payable management provides actionable insights that can be leveraged to enhance contract negotiations and strategic sourcing, as well as strong supplier relationships that enable access to better payment terms, discounts, and other vendor “perks.”
“Achieving effective accounts payable management begins with adopting, and enforcing, a set of best practices to ensure consistent and reliable performance.”
The Risks of Suboptimal Accounts Payable Management
Like an engine running on half its cylinders, your accounts payable department can’t operate with peak performance if it’s not optimized through strategic policies and process management.
Sluggish invoice processing means you can’t capture early payment discounts, may incur late payment penalties, and will probably end up with less than stellar payment terms—along with a questionable reputation with your suppliers.
Is your accounts payable department suffering from poor optimization? Consider whether your AP accounting system:
- Is focused on preserving liquidity by delaying payment, rather than capturing early payment discounts and streamlining spend.
- Relies on paper-based, error-prone, manual workflows.
- Fails to issue and track a new purchase order for every new order placed.
- Fails to seek the best possible savings by leveraging economies of scale, volume-based rebates, and trade spend initiatives (i.e., special vendor pricing, rebates, or marketing incentives provided in exchange for preferential product placement by retailers).
- Has no centralized or consistent method for onboarding vendors, tracking vendor information (including contract data), populating vendor data into purchase orders, or confirming contract terms for deliveries.
- Lacks a system for automatic three-way match between the purchase order, receiving documentation, and the vendor invoice for every purchase.
- Has no standardized system for electronic invoicing and payment.
- Lacks support for tracking payments to capture early payment discounts while preventing missed, duplicate, or over/under payments.
If your accounts payable function suffers from any of these inefficiencies, your bottom line, along with your ability to engage in important business processes like strategic planning and generating accurate and complete financial statements, may be in serious jeopardy.
Accounts Payable Management: Best Practices
Achieving effective accounts payable management begins with adopting, and enforcing, a set of best practices to ensure consistent and reliable performance. Every company will of course have its own specific approach to implementation, but in general, every business can free up working capital by following a few straightforward optimization measures.
1. Automate and Go Paperless.
The policies and workflows you establish will have a much higher chance of success if you’re able to make them as swift and efficient as possible. That means removing the human element from high-volume, low-value tasks like invoice processing, data entry, three-way matching, and basic vendor onboarding.
A complete AP automation like PurchaseControl not only integrates with your existing accounting system, enterprise resource planning (ERP) software, and other applications, but streamlines all your workflows across the board through automation and machine learning.
In effect, choosing digital transformation with a software solution lays the foundation for the successful application of all other accounts payable management best practices.
Consider the benefits of a paperless AP function:
- A smaller environmental footprint through elimination of paper waste, storage, and management.
- Cloud-based, centralized data collection, storage, management, and analysis. Connect all your critical accounts payable information to every process, including full transaction details and all related documentation for every single purchase. Seamlessly integrate vendor management, supplier relationship management, contract management, etc.
- Full data transparency makes real-time analysis and decision-making possible.
- A closed buying environment with automatic, accurate, and complete population of all relevant information on purchase orders, without the need for time-consuming manual data entry or the risk of rogue spend and invoice fraud.
- Greatly simplified vendor onboarding through the use of vendor portals.
- Support for electronic payments and eInvoicing.
- Automatic three-way matching reduces exceptions and lowers cycle times for all critical AP workflows.
- Build or restore good relationships with vendors through accurate and complete payments made by the due date (or early, where appropriate), without embarrassing duplicates or missed payments.
- Freedom to use their skills on strategic tasks for staff that formerly spent a lot of time on tedious, repetitive work.
- Easy tracking of essential key performance indicators (KPIs) for internal processes such as Days Payable Outstanding (DPO), as well as vendor performance and compliance.
2. Streamline Vendor Onboarding and Management
With the help of automation and AI, you can take control of vendor evaluation, selection, and onboarding, as well as supplier information management. Ensure your AP function has:
- A simplified vendor onboarding portal to allow potential vendors to enter their information and bids for consideration by key stakeholders.
- Supplier performance standards, tracked by KPIs.
- Complete and accurate vendor data, available on demand in real time. (Centralized data management simplifies this significantly.)
- Frequently updated supplier master data, including any service-level agreements (SLAs). Supplier master data includes detailed information on:
- Goods and services offered.
- Quality standards.
- Delivery timelines.
- Responsibilities and expectations for both the supplier and buyer.
- Special industry or legal requirements for compliance.
3. Take The Pain out of Contract Management
Starting with centralized data management and a fully paperless AP department puts your team ahead of anyone still struggling with paper-based, manual contract negotiation and management. Focus on:
- Cloud-based, digital storage for all supplier contracts.
- Ongoing analysis of vendor performance and compliance data to improve your contract negotiation strength and secure better payment terms to ensure the best possible pricing while preserving working capital.
- Creating a repository of legal-approved templates for more effective contract creation and updates.
- Ensuring your own terms and conditions include transfer of applicable penalties and fees to vendors 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 such as trade spend initiatives, etc.
- Automatic population of contract data, including pricing, terms and conditions, due dates, quality standards, etc. in relevant documents (e.g., purchase orders).
4. Optimize Your Procurement Processes
As AP’s perpetual partner in the procure-to-pay (P2P) process, your procurement department is the other side of the cash flow management coin. With automation, analytics, and process optimization, you can ensure:
- New POs are issued and tracked for each purchase made.
- All procurement and AP metrics—including match rate, discounts captured, vendor invoices paid on or before the due date, etc.—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 both vendor and associated payment terms.
5. Optimize Invoice Processing
Perhaps the most critical of the AP processes, invoice processing presents a powerful opportunity to preserve liquidity through optimization.
- Monitor all invoices via three-way match and return those with inaccurate or incomplete data to the vendor for revision before payment.
- Ensure your accounting system supports electronic data interchange (EDI) so vendors can bill you electronically and you can track all supplier invoices against related documents in your system.
- Automate all workflows, including approvals, where possible. Develop contingencies to reduce or eliminate bottlenecks, and consider automatic payment for verified invoices that meet parameters you set for price and invoice type.
- Track vendor and internal process KPIs to ensure you’re paying early only when it provides substantial benefits (e.g. early payment discounts).
6. Optimize Your Financial Reporting and General Accounting Processes
Your accounts payable management is only as good as your overall financial process management. Set the stage for AP optimization success by:
- Properly tracking all
- Integrating your accounting software with procurement, office suite, etc. to ensure all payments are accurately recorded across the system on the day they’re made.
- Choosing payment methods with the lowest associated charges from your bank.
- Centralizing and automating all tasks where possible, including exceptions, reconciliations, matching (both three-way and contract-based) for all invoices, etc.
Optimizing AP Helps Your Entire Business Thrive
Capture early payment discounts. Say goodbye to late fees and penalties. Enjoy strong, strategic supplier relationships, along with the best possible contract terms. All these things are possible with a smart investment in automation technology and the consistent application of best practices.
By optimizing your accounts payable management, you can rest easy knowing your accounts payable function is focused on generating value as well as protecting cash flow for your business.
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