Adopting Accounts Payable (AP) automation best practices extends beyond preventing costly blunders. Your efforts will go a long way toward protecting your company’s financial health if they are carried out effectively. Here are 22 accounts payable best practices to help you get there.
The definition of Accounts Payable (AP)
Accounts Payable is a list of money your company owes to vendors to buy things on credit. Your company must pay this money on a pre-determined date.
After you pay a vendor, its terms most likely run anywhere from 30 days to a few months. AP can be found on your balance sheet under current liabilities, just as you would expect. Of course, when you pay your suppliers, you’ll have to remove them.
What is an AP Team?
“Accounts Payable” not only refers to the money your organization owes but also to the department that manages this financial aspect. The bigger a company gets, the more sense it makes to have different teams handling various parts of finance.
The Accounts Payable team is responsible for making sure all aspects of accounts payable run smoothly and efficiently. AP teams are always looking for methods to improve the efficiency of their operations.
How AP affects cash flow health
What does the term “Accounts Payable” imply for cash flow? The movement of money in and out of a firm isn’t the only element that affects a company’s cash flow health. Money that isn’t moving can also aid cash position. Let’s use an example scenario to illustrate:
If you purchase $50,000 of raw materials from a supplier today, they would expect payment in 60 days and no installments – just the total amount at the due date.
What does an increase in AP impact cash flow?
Whenever you make a purchase using credit, your combined AP will increase. However, since you paid no money upfront, you essentially get to keep that $50,000 for 60 days interest-free. It’s like taking out a loan without having to pay any interest. Instead of immediately giving away the cash advance, you can hold onto it or use it to fund other projects in the meantime. This type of transaction results in positive cash flow overall.
What does a decrease in AP impact cash flow?
Once the 60 days have passed, you’ll need to reimburse your supplier for the $50,000 invoice. Your Accounts Payable will go down as you pay them back, but this also means less cash will be available. From a financial standpoint, it’s not ideal because you’re technically losing money and could end up with negative cash flow.
What is Accounts Payable management?
The Accounts Payable team is responsible for all the processes, activities, and practices related to vendor invoices and short-term debt. This includes any work that involves trade credit purchases or other payments made to vendors. Organizations typically follow this standard process for managing accounts payable:
- Generating and delivering POs to vendors
- Maintaining and updating a master vendor file
- Approving and receiving invoices
- Recording vendor invoices into the master record
- Verifying and matching invoices to other relevant documents and messages
- Prioritizing invoice payments
- Getting approval to process payments
- Executing vendor payments
Why is AP Management Important?
Because accounts receivable have such a significant effect on liquidity and available cash, they always take the spotlight when managing business finances. A lot of organizations go to great lengths to improve their Accounts Receivables.
Still, that does not imply you should neglect AP entirely. You can’t afford to overlook any components if you want your company’s financial stability to be optimal. Remember that AP refers to your firm’s responsibilities to others.
The efficiency of your handling team and procedures is crucial. Also, managing and prioritizing invoices to make timely payments is essential to maintaining good supplier relationships. Ultimately, this leads to leaner terms and a favorable cash position.
Because of the current business climate, improving financial management is difficult. It’s challenging to find time and resources to do so. But whether you’re trying to lead in AR, capital investment, or improving relations with investors, modernizing is key for success.
Top Accounts Payable (AP) best practices in 2022 for your business
These 22 crucial best practices for improving your AP management should be considered.
1. Tailor your AP automation to fit your business objectives
Accounts payable objectives must be in line with the company’s goals. This helps ensure your company’s future success and guarantees that your needs aren’t overlooked. As a result, when accounts payable is effective, so is the business as a whole.
2. Build workflows
Without a baseline of your current system’s inefficiencies, you won’t be able to make the improvements necessary for success.
This phase will help you identify bottlenecks, inefficiencies, and waste by either whiteboarding it out with your team or using workflow mapping software.
Businesses are complicated. Every procedure has its own set of special cases. You may include these when mapping out these procedures. This will allow your team to establish guardrails around exceptions, making your workflows even more efficient.
3. Any improvements you want to make should be discussed with your AP team
Your team’s approval and expertise are integral to reforming your AP workflows – you won’t be able to do so without them effectively.
Include them in the decision-making process early to make sure you’re creating the systems they need.
- What do you like about the current processes?
- What don’t you like about the current processes?
- What solutions will have the biggest impact, in your opinion?
- What are your concerns about making adjustments?
4. Be ready to invest in new solutions
Technology is essential if you want to see any real change in your AP department. Have you automated invoicing yet? And are self-service portals part of your vendor management strategy?
You’ll need to invest in better procurement systems if you want to streamline your AP workflows.
5. Get good leadership to support any changes
Changing any procedure may be difficult. The adoption of new technology might make the transition more challenging. To successfully implement and adopt new technology, leadership must champion the change.
In order for changes to be embraced by employees, they should understand how those changes will help the business reach its goals. Work with critical decision-makers individually to show them how new systems can improve efficiency and reduce waste.
6. Track KPIs
KPIs are essential for assessing the success of your efforts. Begin by obtaining a baseline of any process. After that, keep track of AP KPIs while automating purchasing to evaluate success. This will assist your team in keeping an eye on what matters as they continue process improvement.