7 Best Practices in the Accounts Payable Process

As a back office function, optimizing Accounts Payable (AP) often takes a back seat to other priorities. However, rising security risks and increasing pressure to do more with less in today’s business climate have forward-thinking organizations implementing best practices in the Accounts Payable process as a core strategy for improving working capital, strengthening internal controls, and achieving greater operational efficiencies.

The AP Department does more than keep the lights on. Optimizing payment strategies can increase margins and free up working capital to fuel growth. On the flip side, inefficiency can increase costs by accumulating late payment fees or missed or duplicate payments.

At a time when supply chain issues make strong vendor relationships more important than ever, inefficiency also erodes goodwill. Unfortunately, that can trigger slower delivery times, less willingness to fix issues, tougher payment terms, and slower query response.

Here are 7 easy-to-implement best practices in the Accounts Payable process that can transform your back office into a strategic asset to your business.

Best practices in the Accounts Payable process your business needs to leverage

Embrace a digital-first approach.

While the Federal Reserve Bank of Philadelphia predicts that paper billing will become obsolete by 2026, AP Departments continue to receive 35% of invoices in paper form.

Unfortunately, processing paper invoices is rife with inefficiency and risk: It takes about one hour to process just five paper invoices manually. Manual processing is also prone to human error, with every paper invoice error costing $53.50 to rectify.

Paper invoices are more likely to become lost, damaged, or overlooked as well.

Embracing a digital-first approach is essential to modernizing AP. Ardent Partners research found that paperless invoice processing at best-in-class AP organizations helps reduce costs by 80% and increase processing speed by 73%.

Most modern vendors offer the option of electronic invoices. Creating a single repository to receive them is another best practice in the Accounts Payable process, ensuring nothing slips through the cracks.

Invest in software automation.

AP teams face mounting pressure to pay vendors on time to keep goods and services flowing. Rising wages and an ongoing shortage of solid candidates make increasing headcount a poor solution.

Assigning human workers to physically track down documents, manually enter data, and obtain approvals in person or via prolonged email threads also has high potential for errors. Too often, that leads to duplicate payments or overpaid, underpaid, or missed invoices.

These manual processes further increase costs while decreasing control and visibility into invoice status for the organization.

Automation infuses the invoice payment process with efficiency – reducing errors, catching signs of fraud, and significantly decreasing the time and expense consumed by AP activities. It also gives AP teams the bandwidth to take on more strategic tasks without additional staff.

Gartner reports that finance leaders consider 89% of accounting activities highly automatable - and nearly 75% plan to use automation to tackle their top priorities.

Self-service portals are another best practice in the Accounts Payable process enabled by automation – increasing vendor visibility while reducing AP workloads. Currently, 43% of AP teams spend 6 hours or more per week answering vendor inquiries.

Standardize AP workflows.

Setting common practices and standards for managing invoices from start to finish is key to improving the productivity and efficiency of AP processes.

Start by making sure your suppliers know exactly where to send invoices and inquiries. For instance, invoices sent to individual departments instead of your central repository are more likely to disappear.

Failing to establish and enforce a central inquiry location frustrates vendors as well, causing queries to languish with wrong or absent recipients. It also can drive inefficiency if multiple team members are contacted by a vendor and tackle the same issue.

Segregating vendor inquiries from electronic invoice submissions is another best practice in the Accounts Payable process. Without a separate entry point, vendor inquiries will clog your invoice repository – making it difficult to track invoices and confusing automated processes.

Standardized workflows make it easier for AP teams to handle inevitable process exceptions as well, like the lack of PO (purchase order) information on invoices. Clearly defined next steps prevent teams from wasting time hunting down the right information source to fill critical data gaps – removing one of the most time-consuming aspects of invoice processing.

Standardization also simplifies approval workflows and escalation paths, ensuring teams know how to keep the process moving forward when they fail to get a timely response.

Make electronic payments.

Manually writing and cutting checks is more than time-draining, it’s pricey - costing organizations about $5 each. Here’s why electronic payment methods like credit cards or ACH (automatic clearing house) transfers provide a win-win alternative for you and your suppliers:

Processing electronic payments is typically 10 times cheaper than paper checks - eliminating paper and postage costs, as well as the time to print, sign, stuff, and mail checks.

Strengthen supplier relationships with faster payments and robust security. Electronic payments increase POT (Paid On-Time) metrics; for instance, direct deposits can appear within 24 hours while mailed paper checks can take 5 business days or longer.

Improve visibility into payment status and financial metrics, creating accurate audit trails and minimizing the cost of data entry mistakes.

Enable penny tests for preventing fraud, sending small electronic payments to new vendors to verify authenticity.

Since electronic payments rarely fail, they reduce escheatment - the process of reporting and remitting unclaimed property to the state. Escheatment creates a major headache for companies that need to account for lost checks.

Improve efficiency and visibility with a disbursement calendar.

While there will always be urgent requests, building an AP disbursement calendar adds structure and efficiency to your payment process. Establishing a set payment schedule that the business can reference reduces ad hoc requests.

It also reduces bank fees by allowing AP to schedule similar payments at once; for instance, sending all ACH transfers on Thursdays.

Disbursement calendars increase internal controls as well, making it easy to track outgoing payments for the week. Greater visibility leads to better cash flow management and DPO (Days Payable Outstanding) metrics - helping organizations effectively use credit terms to optimize management of working capital while maintaining good supplier relationships.

It also ensures they have the right amount of cash available to pay bills.

Mitigate fraud through segregation of duties.

Accounting departments generate the second-highest amount of fraud in a corporation, according to the Association of Certified Fraud Examiners (ACFE). In AP, that includes cash skimming, check tampering, over-reporting supplier payments, falsifying invoices, and recording misleading information.

Accounting fraud brings a high price: ACFE reports average losses exceeding $1.1 million. Issuing incorrect financial statements also risks regulatory action, increased audit requirements, penalties, and reputational damage.

Segregating AP duties across multiple employees stands as a vital internal control, decreasing opportunities for committing and hiding fraud while performing work.

Putting more eyes on the payment process also helps detect and correct errors. It further moves organizations toward a process-dependent mindset, reducing reliance on tribal knowledge.

Prioritize vendor reconciliation.

Faced with abundant invoices and limited resources, many AP Departments largely ignore vendor reconciliation – only looking for discrepancies if there is a problem with the account. Here’s why a robust and regular process for reconciling supplier statements with the actual balance is an important best practice in the Accounts Payable process:

Protect your enterprise from financial risks, such as spending more than you owe or processing duplicate invoices.

Ensure the general ledger is correct and resolve exceptions proactively.

Mitigate fraud risk with heightened scrutiny.

Strengthen vendor relationships, reducing inquiries and service disruptions by ensuring on-time payments.

Improve data visibility with more accurate records.

Improved accuracy also improves budget analysis, leading to better cash flow forecasts.

Modernizing AP delivers peak performance

A well-run AP Department delivers great benefits – boosting your organization’s cash position, credit standing, and access to business-critical resources through strong vendor relationships.

Taking advantage of best practices in the Accounts Payable process and advanced technology like automation holds the key to modernization: streamlining operations, minimizing risk, enhancing service levels, and adopting a strategic approach that maximizes cash flow for your enterprise.

Ready to modernize your AP Department but unsure how to get started? Schedule a consultation with our finance transformation experts today!