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What is Accounts Payable? Understanding Accounts Payable (AP) to decide whether you retain or outsource your AP operations

What is Accounts Payable?

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Accounts Payable are a critical concern for business owners, financial controllers, and anyone involved in making or authorizing payments. Knowing how to properly manage AP can prevent financial losses and compliance issues.

This article will explain all the basics surrounding Accounts Payable and offer some best practices when managing your organization’s Accounts Payable needs. By doing so, you’ll gain crucial insights into successfully controlling costs while still meeting customer-supplier requirements. 

See more» [Webinar Report] Accounts Payable Outsourcing Best Practices

What is Accounts Payable?

Accounts Payable (AP) is the debt and liability side of business transactions, representing what your organization owes to vendors for goods or services acquired on credit. It’s essential to maintaining a healthy financial flow within the company.

Accounts payable plays a critical role in managing the flow of cash and invoice payments moving out of an organization. The Accounts payable department makes sure vendors are promptly paid after all receipt orders and invoices have been thoroughly verified to ensure that what was ordered is received before payment takes place, amounting to efficient budget management throughout.

A company’s balance sheet showcases its current liabilities – and one key component is Accounts Payable. This figure reflects all of the obligations due to suppliers over a defined period, providing them with an IOU from their partner business or entity that must be repaid in time. In return for this debt taken on by the company, those they owe will credit their accounts receivable with equal value.

A company’s Accounts Payable is a critical metric for managing cash flow. An increase in Accounts payable indicates the business has been buying more goods and services on credit. At the same time, decreases point to faster payments of prior obligations – crucial insights into current financial health. Monitoring and managing these figures is essential for maintaining balance sheet stability.

By utilizing the indirect method to form their cash flow statement, businesses can gain greater control over their cash reserve. For instance, if a company seeks more readily available funds for a particular time frame, it can quickly increase those reserves by simply lengthening the payment terms on all open accounts payable balances.

Balancing the need for flexibility with sound business practices is paramount; keeping vendors happy by regularly paying expenses on time is essential.

Modern AP: The evolution over time

Necessities and not simply novelties spurred on Accounts payable evolution. By utilizing AP Automation to manage hefty volumes of invoices – with an emphasis on accuracy – organizations have acquired operational excellence in their accounts payable departments at a steady rate.

Tracing the origins of Accounts payable helps us gain a deeper understanding of its current state; by looking back at our history, we can unlock potential paths to success in this constantly-evolving field. To recognize when it’s time to take the next step forward, let’s analyze some critical moments throughout Accounts payable storied past.

Paper – The Dark Ages

What is Accounts Payable?

From the 1980s onward, Accounts Payable Departments had to manage physical paperwork from vendors painstakingly. The process would involve verifying costs and cutting checks for each invoice manually shuffled through companies until it arrived in Accounts Payable – a time-consuming task.

Delayed payments can detrimentally affect businesses, especially when manual processes are involved. To minimize the risk of slow invoicing, some companies prefer to use 90-day net payment terms and hope that someone notices their request before it gets buried on the desk or sent off to the wrong people.

To increase capacity for processing payables, they increased staff, supplied different staplers, and implemented more file cabinets – a dynamic combination to help maximize productivity.

Desktop Computers – The Renaissance

What is Accounts Payable?

With the emergence of personal computers in the workplace, accounting departments were revolutionized:

  • Invoices could be received and processed quickly and electronically.
  • Vendors across vast distances now had a streamlined communication channel through email or instant messaging technology.
  • Specialized software was designed to manage Accounts Payable operations specifically.

Companies sought to revamp their operations for greater efficiency, accuracy, and timelier payments. Despite streamlining processes with technology, much of the work still required manual labor, such as data entry, due to reliance on paper-based billing and check systems.

As digital transactions accelerated, so did the need for more robust measures to protect against Accounts Payable fraud. To keep up with this prevalence of cybercrime, businesses had to bolster their internal controls to safeguard themselves from outside and inside threats. However, with these reinforced processes in place, teams could maximize productivity levels within Accounts Payable departments.

Accounts Payable Automation – The Enlightenment

What is Accounts Payable?

Today, companies of all sizes are leveraging the power and cost savings that AP Systems bring to their operations. These systems guarantee budget-friendly outcomes and allow organizations on a digital transformation journey to unlock new levels of efficiency and innovation.

Accounting professionals aim for significant success in fraud protection, scalability, and compliance even as legal regulations become more complex. Automating digital platforms allows Accounts payable Managers to swiftly verify invoices with minimal inaccuracies, saving considerable time while avoiding costly mistakes.

Financial Controllers gain invaluable reporting abilities to provide Chief Financial Officers with a complete overview of the organization’s finances, including identifying liabilities such as outstanding invoices. This offers much-needed visibility and security into how company funds are utilized.

Accounts Payable has the potential to be a true partner in financial success rather than just handling transactions. Involving the department proactively can help propel company profits and enhance performance overall.

Organizations must assess where they fit in the AP landscape as automation continues to evolve. To better understand this, let’s review today’s range of automation capabilities and gain insight into how your organization can benefit from them.

See more» What is Accounts Payable Automation? 

The AP Workflow that you should go through

An influential AP workflow is essential to any business, starting with submitting supplier invoices. AP clerks must ensure accuracy by verifying documents and coding them for recording in a general ledger before proceeding further.

Following approval from necessary parties, invoices can then be processed for payment – quickly yet methodically managing cash flow within an organization.

The Accounts Payable Process to optimize

What is Accounts Payable?

Companies must carefully manage the Accounts Payable process to prevent fraud, pay vendors on time, maximize cost savings and maintain compliance with internal controls.

This involves a range of steps, including maintaining vendor records in an accurate master file; entering invoices into financial systems electronically; verifying the accuracy and seeking approvals where necessary; responding promptly to queries from suppliers while working proactively to negotiate terms that benefit both parties.

These activities ultimately support efficient payment processes and enhanced security against fraudulent activity or avoidable duplicate payments.

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Choosing Accounts Payable Software that fits your needs

Companies can gain enhanced visibility and control of their financial data by automating manual AP processes with AP Automation Software.

This software streamlines GL coding, invoice approvals, notifications, duplicate invoice identification, and other activities for a more efficient workflow. It ultimately helps businesses save time while optimizing the accuracy and reliability of payments to vendors.

See more» The most popular Accounts Payable Automation Software in 2022 you need to know

Should You Expand Your AP Team?

What is Accounts Payable?

As your business expands, it can be difficult for existing AP staff to handle increasing invoices. While adding another person may help with the workload, additional costs and onboarding time should also be considered before bringing on more personnel.

Evaluate current resources and consider ways they could contribute further to make a well-informed decision about growing your Accounts Payable team.

See more» The Ultimate Guide to Top 10 Accounts Payable Metrics

Hire or Optimize: Make the Right Choice for Your Organization

Before you invest significant time, energy, and money to hire another person, consider ways your existing processes can be streamlined. Evaluate if that extra workforce is essential before taking on the weeks or more long hiring and training process.

Unlock the untapped potential of your Accounts Payable Department with an intelligent invoice management system! With no upfront investment and limited changes to existing processes, you can enjoy greater job satisfaction and productivity among AP staff. Put their skills into action by enhancing communication in every aspect of approval – watch as they benefit from faster approvals and find true fulfilment in their work.

Accounts Payable is an essential function in a business that can significantly impact your company’s bottom line. When deciding whether to retain or outsource Accounts Payable operations, it is critical to understand how AP works and what factors should be considered. We hope this article has helped you better understand AP and the decision-making process involved in retaining or outsourcing AP operations.

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