Managing AP is a constant balancing act of maximizing cash flow while maintaining vendor relations, and ensuring that your company has enough working capital at all times. There are times when delaying payment is beneficial, like when financing is limited, and other scenarios when prompt delivery may be more important, like when early-pay discounts apply.
But nearly half of all invoices in the US end up overdue, straining relationships and putting vendors at risk. Automating the process can benefit both sides.
This article will examine how to manage accounts payable effectively, providing six best practices to implement.
Goals of Accounts Payable
Modern accounts payable best practices are focused on building and maintaining the company’s financial health rather than just paying invoices on time.
This can be a complex strategic initiative with the following major goals.
Reduce Processing Time
In manual AP environments, the cost of processing an invoice can be as high as $15.97. Incredibly, many AP teams are still manually keying in invoices or even matching invoices.
Introducing automation can considerably shorten processing time and costs, dropping the expense to just $1.77 in some cases. Those savings — time and money — reduce overhead and free up human capital, and they also allow businesses to implement a more strategic approach to accounts payable.
You can then decide exactly when to process and pay, without having to bake in long (sometimes weeks or months-long) lead times to the calculation.
Minimize errors
Humans aren’t perfect. Manual data entry inevitably leads to errors, especially when accounts payable employees are overworked. The Institute of Finance and Management found that nearly 40% of invoices include an error. While many of those are small and seemingly irrelevant, they can add up or chip away at vendor trust.
Minimizing errors is one of the key reasons why companies are turning toward automation, which provides more reliable data entry and processing.
Improve cash flow
Cash is king, and optimized cash flow can give businesses a strategic advantage. Without working capital, you can miss investment opportunities, struggle with operational expenses, or lose leverage in vendor negotiations.
An accounts payable manager who can extend payment terms without jeopardizing the relationship or accurately forecast outgoing cash will give his company a leg up.
Scale and integrate
For a long time, accounts payable was siloed away, reactive in nature and mostly disconnected from financial decision-making. But as software has improved, so has the availability of real-time insights and easier access integration of accounting and finance platforms.
Modern best practices for accounts payable focus on cross-department data analysis and collaboration to guide decisions.
Maintain strong vendor relations
Strong vendor relationships can lead to better payment terms, priority service, and a more trusting atmosphere. It also supports positive, collaborative relationships through responsiveness to vendor queries, transparency on payment status, and making on-time payments.
6 Accounts Payable Best Practices
How do you achieve these goals? Here are six tips for how to manage accounts payable effectively.
1. Create Efficient and Standardized AP Workflows
Effective accounts payable management starts with standardized workflows. There should be a repeatable, step-by-step roadmap that starts when an invoice is received and continues until the moment it is paid and recorded.
Here are some ways to build these workflows:
- Centralize invoice receipt: All invoices should arrive in a central location, allowing for intelligent data capture and automated categorization.
- Automate smart invoice processing: Give up manual processes and intelligently match invoices, while improving automated routing and coding.
- Embrace machine learning: Three-way matching invoices against the purchase order (PO) and the goods receipt note is easy when all relevant details are available. For invoices —PO or non-PO—with incomplete or missing details, autoML-powered AP automation uses real-time feedback to make suggestions and raise straight-through processing rates.
Standard workflows will reduce errors and make it easier to audit your systems to find any bottlenecks.
2. Establish Effective Internal Controls
Fraud can be even more damaging than simple errors. Internal controls and procedures will ensure integrity and compliance.
Separate duties to make sure no single individual has full control of a transaction and add authorization routes to give accounts payable managers oversight. Regular verification and reconciliation against bank statements or ledgers will catch issues before they get out of control.
3. Eliminate Manual Processes
More than half of accounts payable employees spend over 10 hours a week processing invoices. Effective AP software can dramatically reduce this time with features like:
- Intelligent data capture
- Smart invoice matching, routing, and coding
- Automated payment
- Vendor self-service
By removing the mundane, repetitive tasks that are the cause of most accounts payable errors, your team can focus on more strategic initiatives and decisions.
4. Collaborate with Stakeholders
While on-the-ground accounts payable employees will have unique insight, they can also sometimes overlook opportunities for improvement. Collaborating with various departments, vendors, and sometimes even customers can make the process even better.
Work closely with procurement on purchasing policies, vendor management for better payment terms, and IT to integrate systems. Regular meetings and updates for key stakeholders should encourage transparency and feedback.
5. Maximize Resources and Lower Costs
Every dollar you can save is one that can be used elsewhere. Here are some ways to maximize your resources:
- Use AI and machine learning: Leverage artificial intelligence to improve straight-through processing rates and increase fraud detection.
- Analyze purchasing processes: By using real-time AP insights, you can find opportunities for early-pay discounts and evaluate vendor quality.
- Encourage competition: Changing suppliers doesn’t have to be scary. Try to encourage competitive bidding while ensuring quality doesn’t drop.
Accounts payable has the opportunity to add strategic value when teams are efficient.
6. Achieve Full Visibility
Effective accounts payable management requires transparency and visibility. For starters, a single source of truth provides real-time invoice status and supports improved vendor and query management.
Confidence in your data gives you the ability to step back and evaluate performance. Measure exception handling rates and key AP metrics to identify areas for improvement. Advanced analytics from AP software offers upper management the tools to make better decisions.
Raise AP Productivity
Many accounts payable departments still use legacy systems and practices. The modern business will use AP automation whenever possible, reducing the workload and better-allocating resources.
By encouraging collaboration and transparency, you can grow a leaner, more efficient operation.
SoftCo provides an end-to-end AP automation solution to reduce costs and lower invoice approval time by 90%. Our market-leading smart matching engine is powered by automated machine learning (AutoML), which exponentially increases matching rates from day 1. We also integrate with over 200 ERPs for seamless and secure data exchange.
Stop wasting time on manual invoice processing. Discover how to build a business case for ap automation and transform your AP department into a powerhouse of efficiency and added value.
