How A Strong Accounts Payable Process Can Benefit Your Business

11/30/2022
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Learn what “Accounts Payable” means, how the process works and why it is important. We also detail how to manage your AP processes to ensure efficiency.

Accounts payable

Your Accounts Payable (or AP) are payments you need to make from your business. This includes payments to your suppliers and vendors, office related costs and salaries.

An accountant in your business would manage the AP flow and the AR flow. The AR refers to the Accounts Receivable. As you may expect, the AR is how much money you are receiving. This could be from recurring incoming payments, one-off credits or interest from investments.

Managing your AP and AR correctly will allow you to understand your cash flow and ensure that your payments can be made on time. Paying your bills late due to a shortage of funds can result in late payment fees. Not only is this an additional expense for your business to cover, but it also shows up on your business’s credit report.

If you want to ensure that your customers are keeping on top of their payments and that you don’t have any issues in your AR process, then Join Creditsafe Trade Payment Data (TPD) Program.

Chapter 1

What goes into accounts payable processes?

Business payments

The standard AP process will go as follows.

The accountant receives an invoice for payment. They log the invoice and check it against the original order of purchase and confirm the information is correct. If not an adjusted invoice or purchase order is created.

Once approved, the payment is made.

Although this process seems simple, there are multiple ways to get this wrong. If the accountant doesn’t monitor how much money the business currently has in their cash flow, they may end up incurring overdraft charges or risk the payments moving to bad debt and incurring additional late fees. And if they know the funds are coming, but don’t correctly organize the timeframe between receiving and paying these finances, they may have payments bounce causing friction with suppliers or worse yet, employees.

As your business grows, your cash flow will be more complicated. Understanding how much money you have currently, and in future predictions, becomes one of the main focuses of this department.

Chapter 1

Key factors to consider in your accounts payable process

The risk of automating account receivable processes

When businesses pay on time it helps to build trust and confidence between both parties. Trust between companies can give you two benefits. 

The first is a more favorable payment term such as discounts, reduced fees, or joint promotions between the two companies. For example your supplier may have access to additional stock at a reduced price and they could pass on some of the savings to you. To suppliers that don’t pay on time it’s likely that they would be less forthcoming with this sort of promotion.

The second is arguably more important - leniency. Perhaps a different customer failed to make their payments to you on time and this has affected your ability to make payments. In this situation, given your positive payment history with suppliers, they are likely to be more understanding and forgo any late fees because of the reputation that you have already established with them.

Maintain accurate bookkeeping

Let’s take a look at a few effective accounts receivable risk management tips so you can lower your exposure to the risks highlighted above.

Bookkeeping

When the audit comes you need to ensure that your finances are all accounted for. With a well-organized system, your business can show a clear picture of its processes including paid taxes, and confirmed business payment regulations. This will help to avoid any unexpected taxation or fines.

An accurate understanding of your business can also create an accurate forecast for your business's future. Using the data gathered by the AP department, you can foresee any issues or improvements to your cash flow in the coming future. This can help when applying for loans to help facilitate business growth, mortgages to buy premises and other types of business finance.

Prevent fraud and errors

A good AP process will ensure that financial fraud cannot be committed through your business, and simple errors are avoided. 

Scams are commonplace and while some are easily identifiable, others are not. A common one is to create a ‘spoofed’ email address at a company and send out invoices to known email contacts with a payment link. Without a robust AP process you could easily mistake these fake invoices for real ones and that could leave you out of pocket. . 

There are a variety of tools available to help with this such as Creditsafe’s 3D Ledger, or even using business verification tools like business credit reports which can be used to screen new suppliers.

Chapter 1

Helpful tips to manage your AP process

To manage your AP process effectively, there are six things you should do.

Document all transactions

Whenever you purchase an order or receive an order request from a client, make sure to document these transactions. Your documentation should be uniform and saved on a secure online platform.

Using Creditsafe’s 3D Ledger (mentioned above) can facilitate this. It can also give you additional insights into your balance sheet, by flagging cash flow problems and highlighting the risk of bad debt.

Use electronic invoices

Going paperless is about more than saving the environment or reducing filing space in your offices. It’s also about saving time and ensuring accuracy in “paperwork”.

You could even go one step further and automate your AP process. This can further help to eliminate errors as documents are scanned, and verified, and correspondent payments will be made accurately.

Prioritize your payments

Particularly when cash flow is tight, it is important to prioritize payments. You may do this based on how overdue a payment is, or how business critical the supplier is. Whatever the case, this is a necessity when your cash flow becomes strained.

Take advantage of automation software

Keeping all your AP transactions in a specialist piece of software is great for convenience and removing errors, but they can also provide additional functionality. For example, if a supplier normally charges $1000 for a given order and they begin charging $1200 - The software could be programmed to flag this for further attention.

Use a two-person verification system

Accounting departments are common targets of payment fraud. A simple step to help prevent the occurrence of this is to add layers of verification. Depending on how big your company is, this may require the business owner to co-sign on all payments or it may be an AP Supervisor. Requiring co-signatories on payments means that transactions will be checked by 2 people, thereby reducing the likelihood of errors.

Pay electronically

Electronic payments

Paying electronically will make sure a clear audit path from incomings to outgoings. You can also set up timed payments to ensure that no recurring bills are left unpaid. The funds also leave your bank almost immediately, helping you keep a clearer picture of your available funds.

Additionally many businesses prefer not to be paid by check or cash due to the inconvenience of banking them, associated fees, and the time spent by banks in processing them before funds become available.

steve carpenter

About the Author

Lina Chindamo, Director, Enterprise Accounts, Creditsafe Canada

Lina Chindamo is a Certified Credit Professional with over 25 years of experience in credit risk management. She has held senior leadership positions at companies like Sony Electronics, Maple Leaf Foods, and Mondelez Canada. Her extensive experience and current role, where she collaborates with c-suite partners and credit teams across various industries, make her a respected figure in the credit industry.

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