Your purchasing process is the lifeline of your business. But over time, the accounts payable cycle grows more complex, leading to inefficiency that can slow the growth of your small business.
An accounts payable process flow chart provides an easy way to visualize processes. It can also serve as a tool to help you discuss the best ways to accomplish your goals.
The following is your complete guide to designing an accounting flowchart to improve every step of your accounts payable (AP) process.
Looking for ways to streamline accounts payable? BILL can help with that.
What is the accounts payable process flow chart?
An accounts payable process flow chart is a visual way of outlining the steps in your accounts payable workflow. It's both a step-by-step guide and a roadmap, showing you how each step in the process relates to your broader accounting system.
You can customize your accounts payable flowchart to suit your unique business or industry, and it'll generally include such accounting processes as:
- Documenting purchase orders
- Invoice capture
- Invoice processing
- Invoice approval
- Two-way or three-way match
- Payment processing
- Recording payments
Maintaining an efficient accounts payable workflow is vital to your small business. Approving invoices on time will improve your relationship with your vendors and suppliers. Paying your vendor invoices on time will help you avoid the cost of late payments or other penalties.
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The accounts payable process flow
What sorts of accounting activities make up the accounts payable process? Your accounts payable process flowchart can be divided into two broad categories: upstream processes and downstream processes.
Full cycle accounts payable (AP) processes will include most, if not all, of the following components, but splitting them into these two categories makes a complex process more accessible for you and your accounts payable department.
Upstream processes
Upstream processes happen between the initial purchase and vendor invoice processing. Common accounting activities include the following:
Purchase requisition
A purchase requisition is an internal document requesting a purchase. Most organizations use this document to approve a purchase before contacting a vendor.
Selecting vendors
Vendors can be selected from your chart of accounts, or you can choose a new vendor. The goal is to select a vendor whose goods and prices align with your purchasing goals.
Creating a purchase order
Purchase orders are used to actually purchase the goods from a vendor. When the vendor sends an invoice, the invoice number should match the number on your purchase order.
Negotiating with vendors
Some vendors may be willing to negotiate on price. If you have a longstanding relationship with a vendor or are completing a bulk purchase, you may be able to negotiate a modest discount.
Signing vendor contracts
A vendor contract commits you and the vendor to complete a transaction at an agreed-upon price or to enter into a formal relationship for the future. The terms of the contract may influence such things as payment deadlines, methods, and other crucial details.
Setting up vendor accounts
Accounts payable teams should set up vendor accounts in their company's system. Make sure to record preferred payment methods and terms for future reference.
Maintaining vendor records
Your vendor records should be up to date. Make sure to jettison old records to streamline your chart of accounts for the future.
Receiving the invoice
Once you complete a purchase, you'll receive the invoice from the vendor. Make sure to respond to the invoice right away, as there are usually payment deadlines assigned by the vendor.
Verifying the invoice
Before paying the invoice, you'll need to verify that the invoice is legitimate. Pay close attention to the quantity and prices on the invoice, and watch out for duplicate invoices.
Downstream processes
Downstream processes involve processing vendor payments and managing your financial data. The payment cycle can begin once an invoice has been received and verified.
Processing payments
Payment processing is the actual act of rendering payment. Your vendor should communicate their preferred payment method to ensure everything is clear.
Communicating with vendors
Stay in contact with your vendor throughout the process. Ask questions about what the vendor is charging you for if the invoice needs to be clarified.
Vendor reconciliations
Reconcile your internal records with the data provided by the vendor. That way, you'll ensure accuracy in your financial records and avoid outstanding bills.
Recording transactions
Always keep a careful record of all your purchasing transactions. Accurate records will help you monitor your company's cash flow and prepare for tax season.
Storing documents
Maintain a clear audit trail by storing your documents. Digital storage can be ideal since you can store vast amounts of data without devoting physical file storage space.
Reporting and analyzing data
Take the time to report and analyze your data. Your purchasing decisions will directly impact your company's overall profit, and stakeholders may need to be made aware of how the company money is being spent.
Conducting audits and internal controls
Conducting audits and internal controls ensures greater accuracy. And by regularly maintaining your records, you'll be better prepared to detect and deal with fraud.
How to create a process of accounts payable flowchart
Now that you understand the basics of your accounts payable process, you're ready to start creating a flowchart to keep your business (and your AP department) organized and efficient. Here are the most essential steps in designing an accounts payable process flowchart to keep your business running smoothly.
1. Create a chart of accounts
Start by focusing on your upstream processes. Before making flow charts and other tools, create a chart of accounts. A chart of accounts lists every account in your general ledger. This will help you identify vendors and suppliers more readily and give you and your financial department a clearer understanding of your company's typical cash flow.
If you're using any business software, you may be able to generate a chart of accounts at the touch of a button. Otherwise, you can create a master list and update your chart of accounts when you form a new vendor relationship.
2. Set up vendor details
Next, set up vendor details in your accounting system. These include the name of each vendor, any notes about the type of purchases you commonly make, and any other details about the vendor.
Most importantly, record any details about the vendor's payment process, particularly deadlines and late penalties. According to CPA Practice Advisor, small businesses pay $3 trillion in late fees annually. Staying on top of your payment cycle can save your business money.
3. Create a chart of upstream process flow
The above two steps are preliminary to creating the accounts payable process flowchart proper. Now, you'll make a "start" for the upstream processes. The first few steps of your accounting flowchart will look something like this, with each step leading logically to the next.
- Purchase requisition
- Creating a purchase order
Here is where you'll see a "fork in the road." At this point, your accounting department will decide to go with a vendor from your chart of accounts or negotiate a contract with a new supplier. So your accounts payable process flow chart will include the option to "select vendor," which will then branch off into the following path for selecting an existing vendor:
- Submitting purchase order
- Signing vendor contract
However, if you're selecting a new vendor, you'll create a second branch that lists the following steps:
- Negotiating vendor contract
- Setting up vendor accounts
- Submitting purchase order
- Signing vendor contract
In both cases, the vendor contract may or may not apply depending on your relationship with the supplier. At this step, your branches will converge with the following steps:
- Receiving the invoice
- Verifying the invoice
This will conclude the first half of the accounts payable flowchart, resulting in a completed, verified invoice waiting for payment. At this point, you'll create a secondary accounts payable flowchart for payment authorization and payment execution.
4. Create a downstream accounts payable flowchart
Next, you'll create a separate accounts payable process flow chart for your downstream processes to render payment to your vendor. The "start" will be receiving the verified invoice from your purchasing/receiving department, at which point the payment process can begin.
The next steps will include:
- Payment authorization
- Reviewing payment options and due dates
- Rendering payment to vendor
- Communicating with vendor
However, if a payment isn't authorized, the next step should be communicating with the vendor to address errors or unexpected issues. But assuming that the invoice is accurate and payments are approved, you can pay the invoice.
5. Create a downstream accounts payable process flowchart for managing data
The third portion of your accounts payable process flow chart involves storing data. The "start" of this portion of the chart involves recording each transaction—which also means recording the invoice number and corresponding data from your purchase order(s).
The next steps will involve:
- Storing documents (invoices and purchase orders)
- Reporting and analyzing data
- Conducting audits and exercising internal controls
These steps will ensure that your company has complete control over your purchasing system and that your accounts payable workflow conforms to all legal, financial, and industry regulations that may apply.
6. Analyze the efficiency of your accounts payable flowchart
A final step might be to evaluate the efficiency of your accounts payable flowchart. For example, you may discover that it takes too long for payments to be authorized, resulting in late invoice payments and additional fees. Finding ways to streamline this process will ensure you pay your invoices more promptly, improving your company's cash flow management.
7. Automate core accounting processes
As you look at your accounting flowchart, you'll notice many steps for both your upstream and downstream processes. This creates new opportunities for human error due to manual data entry and disconnection in your core accounts payable processes.
Automation software can improve your accounting system, dramatically increasing your business's speed, accuracy, and efficiency. As a result, you'll minimize the late fees you pay to your vendors and can scale your business without increasing headcount.
Ready to update your accounts payable process flow?
Your business thrives on efficiency. That's why BILL provides accounts payable software to streamline and augment your current accounts payable process. In fact, a 2021 survey of BILL users reveals that business leaders spend 50% less time on their AP processes, giving them more time to focus on growing their core business.
BILL allows you to simplify your accounts payable process into the following four easy steps:
- Capture information from the vendor invoice
- Approve invoices quickly and securely through three-way matching
- Pay using diverse payment methods
- Sync your data for greater control
According to a study from CFO.com, labor costs contribute to 62% of a typical company's AP expenses. But BILL's AI-powered software can help. An invoice data capture tool automatically extracts information from your invoice. It uses this data to populate fields within a bill, including the vendor name, the amount you owe, and the due date.
Additionally, three-way matching allows you to quickly match the data on the invoice, purchase order, and goods receipt. As a result, you'll experience greater accuracy while maintaining high security and financial control standards.
Explore BILL Accounts Payable to learn how you can streamline your financial processes.