Accounts payable.
The part of the procurement process that most departments love to hate.
But what exactly is it and why does it drive people insane?
Accounts Payable Defined
What is accounts payable?
According to Investopedia.com, accounts payable (AP) is:
“…an account within the general ledger that represents a company’s obligation to pay off a short-term debt to its creditors or suppliers.”
Put another way accounts payable simply refers to the credit a company has. This credit is recorded as the amount that the company owes to vendors for services rendered and goods received.
On a company’s balance sheet, this credit is recorded as the accounts payable balance.
In order to see how much is still owed, or what has been paid off, the cash flow statement can be referred to.
The Accounts Payable Process
What are the steps constituting the accounts payable process? What’s included? The entire process is summarized in the infographic below.
Let us carefully examine the accounts payable process in detail.
Step 1: Buyer Receives the Invoice
The vendor sends an invoice or bill to the buyer. The buyer acknowledges receipt of the invoice and checks the validity of the invoice.
Step 2: Buyer Reviews Invoice Details
A further review is carried out by the buyer’s AP department. Details such as the vendor’s name, authorization as well as date are all verified to ensure that the correct vendor is paid what is due them.
Step 3: Buyer’s Accounts Team Update Balance Sheet
The buyer’s accounts department must then amend the business’ balance sheet to reflect any new changes in financial status including payments made and new invoices received.
Step 4: Buyer Makes Payment
Once an invoice has been verified and thoroughly vetted, and managerial approval of the invoice has been given, the bill can be settled.
Now, with this out of the way, why exactly is the accounts payable process so important?
The Importance of Accounts Payable
As a critical business practice, accounts payable is vital to the day-to-day operation of a company. Because most businesses rely on this line of credit, accounts payable act as a lien that builds trust between buyers and suppliers.
That’s not all.
Accounts payable allow the business to continue to receive raw materials and services on a regular basis as long as the invoices are settled on time.
What constitutes an ‘organized accounts payable process? It is characterized by no late payments, no overdue charges, and no penalty fines.
A diligent accounts payable departments department will ensure that each and every invoice has been properly recorded, tracked, and paid for. This will reduce the chances of missed payments, late payments, and double payments.
One of the great freedoms accounts payable renders businesses is the ability to effectively handle the cash flow.
What this means is that money only leaves the business at set times (i.e. when payments are owed) which helps enterprises clearly see how cash is moving in and out of their business.
Accounts payable can provide visibility about any fraudulent dealings. According to the Association of Certified Fraud Examiners (ACFE), at least 5% of companies’ annual revenues are lost through fraud. Worldwide these losses surpass $3.5 trillion. With tighter accounts payable processes, this loss can be mitigated.
Despite being such a pivotal business function, accounts payable is still plagued by some legacy processes, one of which is paper-based invoices.
The Case for Automated Accounts Payable
Did you know that 80% of invoices are still paper-based despite 52% of AP departments’ desire to migrate away from this manual practice?
Paper-based invoices slow down the entire AP process as just 14% of all paper-based invoices manage to be input into the AP system on the very same day that they arrive.
What does this lead to?
A longer processing time – up to 16.3 days for one single invoice – according to the Aberdeen Group.
This isn’t the worst of it as 3.6% of invoices will also have errors when entered manually.
The cost of processing an invoice in an environment that has low-level automation is 20 times more than in environments that have high automation levels.
It’s evident to see that every step from purchase requisition and purchase order to the actual issuance of an invoice should be automated.
Conclusion
Well, now that you know what is accounts payable, it is not difficult to see how imperative this function is for any enterprise.
Because the majority of businesses rely on generous credit terms, having an efficient account payable process benefits everyone involved.
This is why alongside your procurement software such as that which enables you to evaluate purchase requisition vs purchase order you should also think seriously about automating the accounts payable process.
ProcurePort prides itself as one of the leading providers of the best procurement solutions on the market and is trusted by enterprises and organizations such as UNOPS, HUD.GOV, and conEdison.
If you would like to discuss procurement software with a consultant, or to schedule a demo, contact us today.