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What is Accounts Payable Cycle? 

What is Accounts Payable cycle?

Table of Contents

The Accounts Payable Cycle is a critical part of financial management for any business. Efficient Accounts Payable processes to pay vendors and settle charges are vital in managing cash flow and maintaining vendor relationships. 

In this article, we will walk through the Accounts Payable Cycle and the significant steps involved — ensuring smooth payments while improving organizational efficiency.

What is Accounts Payable (AP) Cycle?

The Accounts Payable Cycle is crucial for optimizing your company’s purchasing and payment processes. Known as ‘Procure to Pay’ or ‘P2P’, this series of activities covers every necessary step, from ordering items to ensuring final payment seamlessly reaches suppliers.

The Accounts Payable Cycle is a critical process that must be completed by the Production, Purchase, and Accounts Payable divisions within any business.

This procedure involves the critical actions needed to successfully facilitate an effective transaction – from determining goods requirements to vendor negotiation, issuing orders at determined prices, acceptance confirmation from the supplier, and receipt inspection before invoicing for payment resolution.

Documents exchanged during this cycle are typically Purchase Order forms, Goods Requisition Notes, and Vendor Invoice copies.

Two major Business Cycles

Every enterprise runs two cycles for driving growth – the Revenue Cycle and the Expenditure Cycle.

  • Revenue Cycle, sales & marketing efforts combined with customer satisfaction initiatives generate cash flow.
  • The Expenditure Cycle is managed through purchases from suppliers, production expenses such as wages/salaries, and accounts payable processing.

Major steps in Accounts Payable Cycle

The procure-to-pay cycle is an essential process for companies to ensure the successful acquisition of goods and services. It includes several stages, from placing orders with suppliers, receiving purchase items, and making final payments. By completing each step in chronological order, businesses remain on track for maintaining their Accounts Payable operations efficiently.

The following are steps included in the procure-to-pay cycle:

Determination of Goods Required

The Purchasing department collaborates closely with the Production team to ensure that all required supplies for operations are acquired. The Production manager identifies stock needs and updates the purchases accordingly, ensuring the smooth operation of company activities.

Procurement Process

Once Production has given the green light, Purchasing reviews its records to see if any similar orders have already been placed. If not, the team promptly creates new documents of purchase orders for execution.

Search for Suppliers

What is Accounts Payable cycle?

Unearthing appropriate suppliers to meet business needs is a multifaceted endeavor requiring careful consideration of multiple factors, such as transportability and credit policy. Yet the company leans on familiar vendors whenever possible for its transactions; when these are unavailable, sources can be sought via online marketplaces or referrals from trusted contacts in either locale nearby or far away.

Request for Proposal

After careful selection, a formal document is sent to potential suppliers looking to do business with the company. The supplier sends back their proposal – detailing product quality and rates- to evaluate if they fit the organization’s needs appropriately. All of this culminates into what we refer to as Request For Proposal (RFP).

Review Receiving Quotation

The company evaluates supplier quotations to identify suitable candidates who meet their requirements. After careful selection, they reach out with an invitation for a purchase agreement.

Negotiation Process

What is Accounts Payable cycle?

Navigating the complex negotiation process can often be challenging and arduous. Through a precise screening system, companies can identify reliable suppliers that meet their requirements regarding rates, credit policies, and additional stipulations such as discounts and product quality assurance criteria. Freight charges delivery terms and insurance conditions.

Purchase Order

By giving the official Purchase Order document to the desired supplier, the company confirms its requirements and deadlines for delivery. This seals a successful agreement between both parties.

The Supplier’s Confirmation

As soon as a supplier commits to providing their products according to the terms and conditions provisioned, this agreement is officially in motion. To confirm acceptance of these arrangements, the supplier must provide written confirmation either by post or email.

Suppliers’ Duty

It is essential that the supplier meets all deadlines and keeps our company apprised of their progress. Require timely notifications when products are ready to be shipped and valid shipment documents with details like product descriptions, weights or units, delivery date, and location.

Inspection of Delivered Goods

Quality and quantity assessments ensure the purchased goods meet all expectations. The Purchase department then confirms that these items align with their purchase order.

Invoice Entry

What is Accounts Payable cycle?

Upon successful inspection and meeting all criteria, the Purchasing department opens the payment process to Accounts Payable. Records are then made containing final dates with discounts, reimbursement amounts, and any additional information needed for accurate processing.

Payment

After rigorous checks, the Accounts Payable department promptly makes suppliers’ payments according to company policies.

These can include:

  • Cash transfers or cheque/negotiable instruments
  • Third-party online financial transactions
  • Credit card purchases
  • International payments made with foreign currency (particularly applicable for imported goods)
  • Barters are where payment is provided through the trade of services or products between both parties

Documents in AP Cycle: Relevant and important documents that you need to know

Purchase Order

The company’s Purchasing team engages in an efficient process to obtain and deliver goods; a purchase order is sent out for items needed, giving details about both quantities requested and desired delivery date. This helps ensure the timely arrival of necessary materials required by the business.

Receiving Report

With the goods safely delivered, management works diligently to inspect for quality, quantity, and other essential details – all recorded in a comprehensive report known as Receiving Report. A critical step is ensuring only the best products are released into circulation.

Vendor Invoice

This document is a formal agreement between the vendor and buyer, outlining the goods supplied and their corresponding prices. It also specifies terms such as credit policy and the due date for payment – ensuring all parties are informed of expectations when servicing this financial transaction.

The Accounts Payable Cycle is one of the most important cycles in accounting as it manages a company’s short-term debt. By understanding the steps in this cycle, businesses can more effectively manage their finances and ensure that their debts are paid on time. 

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