Paying your dues is essential for any business, no matter the size, as not stacking up liabilities is an undeniable boost to an organization’s Business Confidence Index (BCI).
Additionally, being able to promptly manage invoices without sacrificing accuracy is a key element in maintaining a healthy relationship with your suppliers, ensuring the stability of the business, and improving the chances of getting better deals along the way.
Needless to say, accounts payable is crucial, and you wouldn't want to get it wrong.
But don’t stress just yet, as we are here to help!
Before discussing what are the best practices to manage accounts payable in the modern day, let’s first make sure that we are on the same page and know exactly what this term means.
Definition of Accounts Payable (AP)
To keep it simple, accounts payable (AP) is the funds you owe to creditors, meaning your debts.
Those debts can come in all shapes and forms, from paying your freelance workforce to ordering a new set of water coolers for the office.
Here, it is important to mention, accounts payable usually refer to short-term debts, meaning those that are planned to be covered within a year.
Long-term debts, on the other hand, are those debts set to be paid over a period of time longer than 12 months, hence, they are not included in the definition of the term accounts payable.
Accounts Payable are not Accounts Receivable
Now, knowing what accounts payable is, let’s imagine an opposite scenario, where another company owes you funds for the goods or services you have provided. Following a similar logic of opposites, those funds would be considered - accounts receivable.
Pretty straightforward, isn’t it?
With the fundamentals established, we can now better understand how you would optimize the management of the accounts payable.
Be Quick with It
To once again emphasize the importance of the well-executed AP process, we have to understand what it means in the practical sense.
At some point, any company will find itself in a position where it needs to in someway rely on outsourced services, such as software, accounting, HR, etc.
In return, set freelancers and service providers are dependent on the prompt and accurate payment of the invoices that they issue, which, as we know now, are considered to be accounts payable.
Therefore, it is of crucial importance to have a reliable and efficient system in place to help you manage those payments.
Accuracy Above All
Besides timely execution, well-managed accounts payable is also heavily reliant on the accuracy of the payments in question.
This may seem like common sense, however, we can not stress the importance of making sure that all invoices are structured correctly.
Before processing any invoice, you would have to make sure that it accurately indicates the obtained goods/services with corresponding prices that you have negotiated with the vendor.
AP Process Flow
In the practical sense, the accounts payable process can be broken down into three major steps, which include:
- Placing the order - meaning completing the purchase of the required goods/services at a negotiated price. During this stage, you shall also negotiate any additional terms and conditions for the transaction and delivery of goods/services in question.
- Receiving the invoice - after the successful placement of the order, the supplier shall provide a report that contains a detailed description of the order with earlier negotiated prices, delivery terms, and other conditions, if applicable. Those invoices have to be stored securely and assigned to be covered on the negotiated date.
- Processing the invoice - once, the invoice is received, you shall check the validity of the set report, matching it against the reality of the received goods/services. If everything is correct, the company can move forward with the invoice for payment.
Even though the process seems simple, accounts payable is one of the areas most susceptible to financial fraud. Therefore, to ensure transparency in this area, it is advised to appoint a dedicated specialist or a department to all of the key steps of the aforementioned flow.
This way, the possibility of fraudulent activity is significantly decreased as it would have to bypass all the departments involved, making it more difficult to mismanage the company’s funds.
Importance of Centralization
Another crucial factor to consider when dealing with AP process flow is to centralize the payments, as that would allow for easier management of the payouts and a clearer overview of the company’s spending.
Breaking down the payments to various accounts is not only counter-productive in relation to the aforementioned flow but once again puts the company at risk of financial fraud.
Track Your Due Payments
In order to establish an efficient AP process flow, your company also has to have a clear overview of all due payments that are coming up, which could be achieved through dedicated expense management software or through old-school practices of manual bookkeeping.
Additionally, some of the payments would have to be covered on a monthly basis, such as any subscriptions to software products or delivery of drinking water for the coolers that we mentioned earlier.
Within a dedicated expense management software, such invoices can be set up as recurring payments, significantly reducing the hustle of going over the same invoice over and over.
Just don’t forget to cancel your old water subscription when you are moving to a bigger office!
When you are not sure who authorized what payment, lots of mistakes are destined to take place. In order to avoid the risk, each invoice should be dedicated to a specific individual who would be in charge of the set authorization.
This structure would allow for a more diligent approach to payments, as multiple dedicated individuals reduce the risk of any due invoices going unpaid.
In the case of faulty approval of the invoice payment, the underlined structure would allow for efficient identification of the responsible individual, resolving the case much quicker.
Conveniently enough, the majority of modern expense management software would allow you to do just that without any external oversight, as all invoices and related actions would be attributed to individuals logged into the control panel.
Why choose a dedicated AP management software
If we didn’t make it obvious yet, we are not fans of manual management of the AP process. It is a highly time-consuming process that is considered to be an outdated practice in the world of modern business.
In the age of digitalization, it is more secure and efficient to implement dedicated software into the workflow, which would allow for more transparency, efficiency, and control.
The age of manual accounts payable management is far gone, and it's time to consider a modern solution if you don’t already have one.
When choosing a dedicated management tool to keep track of your accounts payable, consider Wallester Business.
Our digital solution was developed by the talented team here at Wallester, who made it their mission to help other businesses to optimize their financial management. We provide a full solution to keep track of the AP process within our software, where you can process and store all of your invoices in a digital format.
Accompanied by an unlimited amount of corporate cards issued for your company, Wallester Business provides a full bundle to take your financial management to a new level. And the best part of it all is that you can get it all with our free package!
To conclude, we have to emphasize that any mistakes within the AP process are too costly to allow. Therefore, no matter how much you trust your binder full of invoices, it’s better to digitalize the process and minimize the chances of human error.
The associated risks of the poorly executed AP process will not only leave your service providers, suppliers, and freelance workers dissatisfied but will also increase the risk of fraudulent activity enabled on behalf of your company.
If you want to make sure that all of your AP processes are up to the highest standard, register to Wallester Business and digitalize your financial management today.