As the business landscape evolves, organizations that rely on a traditional accounts payable process will find it more challenging to keep up. That's why it's vital to learn how to manage accounts payable effectively.
Improving the efficiency of your accounts payable (AP) processes can help you strategize cash flow, access important metrics, and improve your relationships with suppliers. Use this guide to learn the best practices for managing your AP processes.
What is accounts payable management?
Accounts payable management is the strategy for handling third-party payments. Effective accounts payable management will allow your organization to maintain positive supplier relationships and optimize your payment process to manage your cash flow.
What does AP management typically entail?
Accounts payable management encompasses a set of processes that include:
- Invoice processing
- Gathering approvals
- Maintaining vendor records and payment information
- Initiating payments
- Maintaining accounting records
Effective AP management will also rely on strategies for maintaining positive cash flow, which is the lifeblood of any business. That's why it's essential to think of your accounts payable department as not merely solving an administrative need but instead serving as an integral part of your business strategy.
Why is accounts payable management important?
Companies rely on effective AP management for two important reasons. First, accounts payable management is critical for good vendor relationships. Paying invoices too late can strain relationships with suppliers, making it harder to secure favorable payment terms and contracts in the future.
Second, an effective accounts payable process will be valuable in cash flow management. For instance, staggering the dates on which you pay your supplier invoices will ensure steady cash flow throughout each month. Knowing how to manage accounts payable effectively, therefore, offers strategic value to your entire business.
What are common challenges in managing AP?
Despite the strategic importance of your AP process, some organizations still face significant challenges when managing accounts payable. These challenges particularly impact businesses that rely on traditional accounts payable processes and manual data entry.
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Timely payments
Think of all the steps currently involved in your accounts payable process. A typical AP team has to process invoices, wait for approval, authorize payments, and submit payments to the vendor. That's a lot of steps, and a delay in each step can slow the whole system down. Delayed payments could result in late fees and strain your vendor relationships.
Accurate payments
Timely and accurate payments are at the heart of every AP system. However, manual processes can introduce significant errors. AP team members might pull the wrong invoice data or send duplicate payments to the same vendor. These sorts of mistakes can cost you money and use time and resources to track down and correct the error.
Scalability
Relying on manual processes effectively limits your business based on the bandwidth of your accounts payable team. You must augment your accounts payable department to handle additional vendor invoices or manage additional supplier relationships.
Hiring more team members can help, but this can be a burdensome expense for small business owners, and it only sometimes leads to greater efficiency.
Benefits of accounts payable management
Properly managing your accounts payable process will substantially benefit you and your company. Here are some of the measurable benefits of a well-managed AP process.
Cost savings
Ensuring timely payments can save money across your accounts payable process. That's partly because you can take advantage of early payment discounts on individual invoices. Even if you don't receive a discount, an efficient system can help your organization avoid late payment fees and other penalties.
Cash flow management
Your accounts payable department plays a strategic role in managing your company's cash flow. For example, accounts payable teams can stagger the dates you pay your vendors and creditors. Delaying payments ensures that you won't face a massive cash outflow at the same time each month. Instead, you'll enjoy a steady flow of cash from week to week.
Stronger vendor relationships
Late payments can place unnecessary strain on your relationship with suppliers. By paying your supplier invoices promptly, you'll avoid late fees and nurture strong relationships that can pay big dividends. Suppliers may extend early payment discounts or be more willing to negotiate lower payment terms for future purchase orders.
Fraud prevention
A well-managed accounts payable process can provide internal controls to detect unauthorized payments or fraudulent activities. As a result, businesses can have greater confidence in their ability to identify and prevent fraud or even costly human error.
Also, with careful segregation of duties, you can provide additional accountability for your AP team members and mitigate errors and fraud.
Regulatory compliance
Efficient AP management also ensures compliance with accounting standards and financial regulations. Maintaining accurate, up-to-date data will equip you to report your financial data to the appropriate regulatory body and help you make well-informed business decisions.
7 tips to manage accounts payable effectively
How can you make your accounts payable process more effective and efficient? Here are some tips to help you better manage your accounts payable process.
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1. Centralize your entire accounts payable process
Aim to create a centralized system for your entire AP process. That way, you'll have a single point of contact for your vendors, which will improve communication. You'll also be able to design a standardized invoice approval process that'll ensure consistency for every payment you process.
A centralized process ensures more visibility, making pinpointing human error or inconsistencies in your financial processes easier.
2. Implement accounts payable automation
Automation can streamline tasks that formerly relied on manual data entry. These automated tools will, therefore, allow you to complete your AP processes faster and with less chance of human error.
Automated tools can also improve the speed of your invoice approval system, which can help you process payments much more quickly and handle a larger selection of vendors and contracts.
3. Prioritize your invoices
Optimize your invoice processing system to ensure you pay your most important invoices first. Some invoices may offer early payment discounts, making them a higher priority. You can also focus on invoices that have late payment fees.
Prioritizing these invoices can save you money while also nurturing relationships with your suppliers.
4. Build strong vendor relationships
Maintaining positive relationships with your vendors has enormous strategic value. Paying your invoices promptly will ensure you remain in good standing with suppliers.
Managing accounts payable efficiently will require you to maintain contact with your vendors so you can stay up to date on payment terms and other expectations. Responding quickly to vendor inquiries will help you maintain a strong relationship that may even translate into discounts in the future.
5. Maintain accurate records
Accounts payable teams should work hard to keep accurate records of their purchase orders, invoices, payment details, and vendor information.
Having detailed records will provide a clear understanding of your business's debts to its creditors. This ensures greater accuracy within your accounting system and also creates detailed records that you can use to resolve potential disputes with vendors.
6. Implement internal controls
Every business should take steps to establish internal controls. Segregating duties will ensure greater accountability for each team member, reducing the risk of breaches of ethics. And a standardized AP process will likewise empower you and your team to identify areas of risk or incidences of fraud.
While no system can eliminate fraud altogether, these methods will mitigate the risk and help you respond more quickly to suspicious activity.
7. Review your accounts payable process regularly
Managing accounts payable is an iterative process—meaning you'll seek a culture of continuous improvement in your accounts payable department. Think about how your current AP process affects your cash flow or how your vendor management strategy influences your supplier relationships (and costs).
How can automation help in AP management?
As you know, traditional AP processes rely on many repetitive administrative tasks. Why not simplify things with AP automation? Here's what you can expect from an automated system.
Save time
According to one major business study, employers anticipate saving up to 3 hours daily by implementing automated tools. That translates into 360 hours each year. Think of what your AP team could do with 360 extra hours each year.
With features such as automatic invoice capture, AP automation makes it easier to process invoice data and secure approvals. That means you'll get more done, which can help you scale your business.
Save money
Remember—early payments often translate into discounts with certain vendors. But even if they don't, you'll still avoid late fees from missed payments. You'll also be able to increase your company's bandwidth since automated software systems can handle more invoices without forcing you to hire more employees. That can be a small business owner's dream come true.
Keep better records
AP software will centralize all of your invoice and purchase order data. This means you won't have to worry about whose desk an invoice is on or how to store your records in cumbersome filing cabinets.
Instead, authorized users can access this data through a centralized dashboard for greater visibility and control. The best AP software will integrate seamlessly with your accounting software so you can streamline your entire financial system.
Safeguard your data
According to one report, 46% of data breaches happen in companies with 1,000 or fewer employees. Even small businesses need a system that protects their most valuable data. Today's best AP systems will provide industry-leading protections to safeguard your data and minimize the risk of cyber threats.
Ready to manage accounts payable effectively with automation?
Through AP automation, your organization can also experience greater productivity and efficiency. Discover more about what BILL can do for your business by visiting the AP page or signing up for a risk-free trial today.
Case study: How BILL Accounts Payable increases efficiency
If you're a fitness or outdoors enthusiast, you're probably familiar with the Clif Bar. The same company later evolved into the Clif Family Winery & Farm. The family was constantly seeking new ways to innovate its business practices for the benefit of the community, including putting in additional safeguards to protect against fraud.
"BILL has made every aspect of AP management significantly more efficient," says Debbie Bawden, the Clif Family's senior accountant, who reports that automation has given the organization two to three hours of additional time per day.
Case study: How BILL Accounts Payable helps remote teams
BetterRX has changed the way patients receive care in a hospice setting. And BILL is happy to assist in that mission, even allowing the company to be fully remote.
"We've been fully remote for years, thanks in part to BILL," says Randi Letendre, CFO of BetterRX. "We're a technology company, and having the right accounting tech stack is important to us. Having BILL — which lets our people work from literally all over the world, accessing the platform anywhere, from phones and other devices — is fabulous."
Accounts payable management FAQ
What are the key components of AP management?
AP management requires precise, accurate invoice processing, invoice approvals, payment authorization, and the execution of payments. Managing each process effectively will lead to greater efficiency in your AP system.
How does accounts payable management differ from accounts receivable management?
Accounts receivable refers to the money your company receives from outside, so AR management focuses on income. AP management refers to money your business owes to third-party creditors. It focuses on strategies to manage your cash flow and ensure timely payments.