10 Accounts Payable Best Practices for Effective Management
Accounts payable (AP) is the money a business owes to its suppliers. Sounds pretty basic, right? But managing it the right way can actually make a big difference for your business. Mess up AP, and you could end up with cash flow issues, late fees, or worse, unhappy vendors.
For small to mid-sized U.S. businesses, getting AP right means saving time, cutting costs, and keeping things running smoothly. It’s about making sure you pay on time, keep your vendors happy, and avoid costly mistakes.
In this blog, we’ll show you 10 simple ways to make your AP process work better, faster, and with fewer headaches. Let’s get started!
What is Accounts Payable (AP)?
At its core, accounts payable (AP) is simply the money your business owes to suppliers for goods or services it’s already received. It’s a key part of managing your business’s finances, ensuring that you keep track of what you owe and when payments are due.
Every time your business purchases something on credit, whether it’s raw materials, office supplies, or even services like consulting, it creates an accounts payable. These are amounts that need to be paid within an agreed time frame, which could range from 30 to 60 days, depending on the terms.
AP isn’t just about paying bills, though. It involves:
- Receiving Invoices: Suppliers send invoices once they deliver goods or services.
- Recording the Amount: The amount due is recorded in your AP ledger.
- Approval: The invoice is reviewed and approved for payment.
- Payment: The final step is paying the supplier, either through bank transfer, check, or other payment methods.
Managing AP well means keeping everything organized, knowing who you owe, how much, and when the money is due. It's about ensuring your business stays in good financial standing and avoids any hiccups like late fees or strained relationships with vendors.
Why Efficient Accounts Payable Management is Important?
Ignoring or mishandling accounts payable (AP) can quickly snowball into bigger problems for your business. AP might seem like just another task, but it directly impacts your cash flow, relationships with suppliers, and overall financial health.
When AP goes unnoticed or is poorly managed, several things can go wrong:
- Cash Flow Problems: If you’re not keeping track of when payments are due, it can lead to cash flow issues. You might find yourself scrambling for cash when a payment is due, or worse, having to delay payments that could result in late fees.
- Strained Vendor Relationships: Timely payments are crucial for keeping your suppliers happy. Late payments can strain relationships, and in some cases, suppliers might even cut off service or raise prices. You don’t want to find yourself scrambling to find a new supplier because your payment schedule was out of whack.
- Missed Discounts: Many vendors offer discounts for early payments. Failing to manage AP efficiently means you could miss out on these opportunities to save money, which adds up over time.
- Financial Penalties: Late payments often come with penalties. Not paying on time could lead to extra costs that hurt your bottom line. These penalties can pile up, especially if you’ve got a lot of outstanding invoices.
- Fraud and Errors: Without proper controls in place, errors and fraud can slip through the cracks. Overpaying or paying the wrong vendor can lead to serious financial damage. In some cases, the business might even face legal repercussions.
With over 500 U.S. businesses served and a 95% client retention rate, VJM Global is trusted for efficient accounts payable management. Our expert team spans 15+ industries, ensuring your AP process runs smoothly.
In short, keeping your AP process organized and efficient ensures your business stays on track, avoids costly mistakes, and helps you maintain strong vendor relationships.
Now, let’s explore how you can manage AP effectively with these 10 accounts payable best practices!
10 Accounts Payable Best Practices for Effective Management
Even with the best intentions, mistakes in accounts payable (AP) can happen. Whether it’s due to a lack of proper procedures or just human error, these mistakes can lead to costly consequences, like missed payments, late fees, or damaged vendor relationships. Here are some of the most common mistakes businesses make in AP management and how to avoid them:
1. Enter Invoices Quickly
When invoices arrive, time is of the essence. The longer you wait to enter them into your system, the more likely you are to miss a payment deadline or make a costly mistake. In fact, the average AP processing time can range from 35 to 49 days in some companies, which means delayed entries can slow down the entire cycle, leading to late fees and vendor frustration.
Actionable Tip: Set up an internal process to enter invoices within 24-48 hours of receipt. This reduces the chances of missing payment dates and ensures that your financial records are always up to date.
Why It Matters: Speeding up invoice entry helps avoid the domino effect of late payments, making sure you stay ahead of the game.
2. Match Invoices with Purchase Orders (PO)
Many companies use three-way matching, a process where the invoice is matched against the purchase order and the receiving report to ensure everything aligns. This process helps to confirm that what was ordered is what was delivered and billed.
The goal here is to ensure that you’re not paying for goods you didn’t receive or services you didn’t order. If something doesn’t match, you catch it early, which is much better than dealing with discrepancies after the payment is made.
Actionable Tip: Create a checklist to compare the invoice, purchase order, and delivery receipt. If something doesn’t match, flag it before proceeding with the payment.
Why It Matters: Three-way matching significantly reduces the risk of paying incorrect invoices and helps you stay in control of your spending.
3. Set Up Clear Approval Workflows
Without a clear process for approving invoices, things can easily get out of hand. With poorly defined approval workflows, invoices can sit for days (or even weeks) without review, which delays payment and causes confusion. Setting up a clear and structured approval process ensures that invoices are checked, verified, and approved by the right people promptly.
Actionable Tip: Use automated software to set up an approval hierarchy based on the invoice amount. For example, invoices under $1,000 can be approved by the department head, while those over $5,000 require manager approval. This speeds up the process while maintaining checks and balances.
Why It Matters: A clear, automated approval process keeps things moving and ensures that invoices don’t sit around unnecessarily.
4. Establish Key Performance Indicators (KPIs)
To manage AP effectively, you need to measure performance. Tracking KPIs gives you a snapshot of how well your process is functioning and where it needs improvement. Some important AP KPIs include invoice processing time, invoice discrepancies, and early payment discounts captured.
Actionable Tip: Track the average days to pay invoices. You might find that certain invoices take longer to approve than others, which could indicate inefficiencies or bottlenecks. Aiming to reduce this processing time is an easy win.
Why It Matters: By tracking KPIs, you can identify and fix any issues in your AP process, helping to improve efficiency and reduce costs.
5. Negotiate Better Payment Terms with Vendors
Many businesses miss out on discounts by not paying attention to payment terms. Vendors often offer early payment discounts, such as 2% off if paid within 10 days, which is a great way to save money. Additionally, extending payment terms (e.g., from 30 days to 45 days) can give you more flexibility with cash flow.
Actionable Tip: Take the time to negotiate payment terms with your key vendors. Even a small discount can add up over time. Similarly, ask if extending payment terms is possible to give your business more breathing room.
Why It Matters: Negotiating favorable terms can lower costs and improve cash flow, helping you save money and avoid unnecessary pressure when paying bills.
6. Embrace Digital Automation Tools
Manual AP processing is slow, error-prone, and can be a drain on your resources. Automation tools help eliminate the grunt work, reduce human error, and speed up the entire process. For example, tools like Bill.com or Tipalti can automatically match invoices with POs, route invoices for approval, and even schedule payments.
Actionable Tip: Implement cloud-based AP software that integrates with your accounting system. Automating invoicing, approval, and payments cuts down on errors and saves time.
Why It Matters: Digital automation ensures that your AP process is faster, more accurate, and scalable as your business grows.
7. Limit Access and Implement Controls
Fraud and errors are more likely to occur when too many people have access to the AP system. By limiting access to only those who need it and setting up clear internal controls, you reduce the risk of unauthorized payments or mistakes.
Actionable Tip: Use role-based access controls (RBAC) to limit access to financial data. Make sure that only authorized personnel can approve payments or change vendor information.
Why It Matters: Strong internal controls prevent fraud, ensure data security, and maintain the integrity of your financial records.
8. Foster Strong Vendor Relationships
Good relationships with your suppliers can save you money, prevent delays, and even lead to better payment terms. Communicating regularly with vendors about payment timelines and any potential delays keeps them in the loop and helps you avoid misunderstandings.
Actionable Tip: Be proactive in communicating with vendors. If there’s going to be a delay in payment, let them know ahead of time. A little transparency goes a long way in maintaining positive relationships.
Why It Matters: Strong vendor relationships lead to smoother operations, better deals, and more flexible terms, ultimately benefiting your business.
9. Monitor Cash Flow Regularly
Without constant monitoring of cash flow, you might find yourself caught off guard when an invoice is due. Keeping a close eye on your finances helps ensure you have enough funds available when it's time to pay. Monitoring cash flow also allows you to adjust payment schedules and make smarter financial decisions.
Actionable Tip: Set up a weekly or bi-weekly review of your cash flow and upcoming AP obligations. This ensures you're always aware of what’s due and can plan accordingly.
Why It Matters: Monitoring cash flow prevents last-minute scrambles to find cash when bills come due and helps you plan ahead for any potential cash shortages.
10. Adapt AP Practices for Scalability
As your business grows, your AP process needs to grow with it. What worked when you had five invoices a month might not work as you scale to hundreds. It's important to regularly evaluate your AP system, tools, and personnel to ensure they can handle the increased volume without sacrificing efficiency.
Actionable Tip: As your business expands, consider hiring additional team members to manage increased invoice volumes or upgrading your AP automation software to handle more complex workflows.
Why It Matters: Scalable AP practices help your business adapt to growth without falling behind or creating bottlenecks.
As businesses grow, so do the complexities of managing accounts payable. What started as a few invoices can quickly balloon into a mountain of paperwork, approval processes, and payment deadlines that are difficult to keep track of. The challenge of managing it all in-house can take up valuable resources, time, and money resources that could be better spent on growing your business.
This is where outsourcing becomes a smart solution. By trusting experts to handle your accounts payable, you not only streamline the process but also gain a level of efficiency and accuracy that can be difficult to achieve internally. But to truly reap the benefits of outsourcing, it’s important to partner with the right professionals who understand your business and its specific needs.
This is where VJM Global comes in. With deep expertise in U.S. accounting standards and regulatory frameworks, VJM Global offers specialized accounts payable outsourcing services.
Why VJM Global is the Trusted Choice for Your Business?
- Accounts Payable: We handle everything from accounts payable to invoice scanning, implementing customized payment terms that align with your business policy. With our accounting outsourcing services, you gain efficiency and accuracy without the headache of managing it internally.
- High Cost Savings: Save up to 50% on all accounting services by outsourcing to us. Why pay for one accountant when you can have an entire pool of resources under one roof? We bring cost efficiencies that allow you to focus on what matters most: growing your business.
- Certified Team of Accountants: Our team includes CPAs, Chartered Accountants, and finance professionals with post-graduate qualifications. Each member is experienced in U.S. accounting standards and tax legislation, ensuring that your business complies with the highest standards.
- Guaranteed Satisfaction: We’re proud of our 95% client retention rate. We’ve worked with numerous U.S. clients who are well-versed in accounting and bookkeeping standards, and they trust us to handle their AP process efficiently.
- Wide Industry Experience: Our team’s extensive experience spans across industries, and we’re always staying up-to-date with current regulations. We don’t just follow accounts payable best practices, we help implement the best accounting processes for your unique needs.
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