Accounts payable, undoubtedly, plays a crucial role in the financial system of every company, making proper management essential for maintaining financial health. However, as businesses grow and thrive, manual AP procedures bring forth their fair share of challenges.
Moreover, clinging to outdated processes hinders companies from making well-informed and timely decisions based on up-to-date insights. These processes can also lead to unnecessary and costly fees.
In this blog, we will delve into the typical issues faced with traditional accounts payable methods, the evolving nature of the AP function, and how the implementation of automated AP systems can effectively tackle these challenges.
What is accounts payable management?
Accounts payable (AP) refers to the outstanding amount a company owes to its suppliers for goods and services purchased on credit. Simply put, it represents the money a business owes to its creditors, vendors, and suppliers for the received goods and services that are yet to be paid for.
Accounts payable management (AP management) is the strategic process of effectively handling a company's accounts payable to optimise cash flow and mitigate financial risks. This encompasses a variety of tasks, such as tracking, recording, verifying invoices, processing payments, and reconciling accounts with vendors.
A well-executed AP management enables companies to maintain strong relationships with suppliers and ensure goods and services are delivered on time. It is a crucial component of overall financial management for any business, as it can significantly impact the company's finance, reputation, and sustainability.
What are the requirements for effective management of accounts payable?
Clear and comprehensive policies and procedures
A well-defined AP policy and procedure manual should be in place to outline the roles and responsibilities of the different stakeholders involved in the AP process, including the purchasing department, accounts payable staff, and vendors. This manual should also outline the steps involved in tracking, processing, and approving invoices, as well as the timeline for payment.
Accurate and timely data entry
Accurate and timely data input into the AP system is essential to ensuring that invoices are processed and paid on time. This includes verifying the accuracy and legitimacy of invoices, ensuring they are correctly coded and entered into the system, and maintaining accurate records of all transactions.
Effective invoice approval process
To guarantee that the appropriate parties review and approve invoices on time, a clear and effective invoice approval process should be in place. This may involve setting up a hierarchy of approval, depending on the size and nature of the invoice.
Timely payment of invoices is essential to maintaining good relationships with vendors and suppliers. This requires a system for tracking payment due dates to ensure payments are made on time and cash flow is managed effectively.
Regular accounts reconciliation with vendors is important to ensure that all invoices have been paid and that there are no discrepancies or errors in the accounts. This also helps identify potential issues or disputes before they become more significant.
Overall, the process of managing accounts payable (AP) is complex, time-consuming, and involves multiple steps and stakeholders. The manual inputting of data and tracking payments through different files and systems not only consumes the AP staff’s valuable time but also potentially causes unnecessary fees that burden a business' resources.
And in today’s fast-paced environment, such time wasted on managing manual processes is both inefficient and detrimental.
Common problems with manual accounts payable
As the business grows and the AP department processes a larger volume of paperwork and data, the challenges of managing, storing, and retrieving these documents become more evident. Holding on to paper invoices requires physical storage, which can quickly become overwhelming.
The sheer volume of paperwork not only increases the risk of duplicate data but also hampers payment efficiency and diminishes financial transparency.
Furthermore, the manual handling of paper documents often leads to human error, further exacerbating the inefficiencies in the AP department. Misplaced or lost invoices can lead to delayed payments and strained vendor relationships.
Additionally, the lack of a centralised system for managing these documents makes it challenging to access critical information promptly, hindering decision-making processes.
Inefficient invoice process
The complex approval process often involves multiple individuals and departments, leading to a constant back-and-forth exchange that can result in miscommunication and the misplacement of crucial data and files. As a consequence, the payment process is significantly slowed down.
Furthermore, the challenge of dealing with multiple suppliers who send invoices in various formats, methods, and currencies can be exceptionally daunting. AP teams need to match invoices with purchase orders, allocate them to relevant cost centres, and reconcile payment information with the accounting system.
If done manually, the process would cause serious irreversible issues, preventing companies from maximising their purchasing power due to critical information being delayed or withheld. This issue is particularly critical for retail businesses operating across multiple locations.
Implementing e-invoicing offers a viable solution to enhance communication and streamline the entire process.
Errors resulting from manual entry
Human errors are unavoidable. Whether it is a simple typo or a misplaced decimal point, these mistakes can have far-reaching consequences. Not only do they require valuable time and resources to rectify, but they also have the potential to disrupt the smooth flow of financial operations.
Like a domino effect, these errors can cascade into other areas, creating a ripple effect that can be difficult to contain. As a result, the overall effectiveness of the data input process is compromised, leading to additional challenges that can hinder productivity and efficiency.
Long and inaccurate closures
Financial closing may be delayed if some invoices cannot be validated, which has the potential to further complicate the company's financial reporting system. This not only hampers the overall efficiency of the closing process but also jeopardises the accuracy of financial statements.
As a result, strained relationships with suppliers may arise, as delayed payments and unresolved invoice discrepancies can erode trust and strain the working partnerships that have been carefully cultivated over time.
The impact of these strained relationships can extend beyond the immediate financial implications, potentially affecting future collaborations and even hindering the company's ability to secure advantageous terms from suppliers in the long run.
Lack of visibility and control
Manual AP processes often lead to a lack of oversight and transparency when it comes to a company's financial responsibilities.
The lack of automation and digital tools can make it challenging to track the status of invoices, monitor cash flow, and identify potential bottlenecks in the payment process. This lack of visibility can result in missed payment deadlines, late fees, and missed opportunities for early payment discounts.
As previously mentioned, mistakes in data entry, duplicate payments, and incorrect invoice coding can lead to discrepancies in financial records, which can make it difficult to track and monitor financial responsibilities accurately.
Additionally, it can also be challenging for businesses challenging to keep up with compliance requirements and maintain accurate financial records as well as to prevent fraud and meet the ever-growing demands for disclosure and audit requirements.
Transitioning from a legacy to an automated accounts payable process
To remain competitive in today's market, businesses must embrace digital transformation and leverage technology and digital tools to automate AP processes.
Research from IFLO (2022) states that 41% of questioned businesses now want to automate their accounts payable procedures during the next 12 months, demonstrating the rising trend towards automated accounts payable.
By streamlining the AP workflow, businesses can reduce manual errors, improve efficiency, and gain real-time visibility into their financial operations.
Automated AP software helps speed up invoice processing, automatically capture invoice data, match invoices with purchase orders, and route them for approval, eliminating the need for manual data entry and reducing the risk of errors.
Furthermore, automation can enable businesses to implement more robust controls and compliance measures, ensuring that invoices are processed accurately and on time.
By digitising the AP process, businesses can also benefit from improved data analytics and reporting capabilities, allowing them to gain valuable insights into spending patterns, identify cost-saving opportunities, and make data-driven financial decisions.
However, transitioning from a legacy, manual system to an automated process requires careful consideration and a step-by-step approach to avoid making even more blunders and errors.
Understanding your current AP
Before embarking on a digital transformation initiative, it is imperative for businesses to thoroughly assess their existing accounts payable processes. Taking a close look at the current systems, scrutinising any underlying flaws, and assessing the associated costs are all vital steps in this evaluation. It is also essential for businesses to keep in mind their AP workflow policies.
Implementing in stages
At the start of the journey towards AP automation, it is crucial for businesses to meticulously analyse each step in the AP process, including invoicing. This allows them to make informed decisions about adopting digital solutions like e-invoicing to enable them to instantly gather data. The implementation of these solutions is swift and straightforward, requiring minimal training.
Once these initial digital solutions are in place, businesses can progress to workflow automation, which encompasses the entire invoice validation and approval process. This advancement in AP automation allows managers to efficiently track payment statuses, manage travel and entertainment expenses, and significantly enhance financial transparency and liability visibility.
Monitoring the transition
Before beginning an AP automation project, it is crucial to establish key performance indicators (KPIs) and regularly monitor them to evaluate the performance of your AP department. By comparing your progress to other businesses that have already implemented automation, you can gain valuable insights into areas where your business can improve or is currently excelling.
Implementing AP automation requires the company to make significant adjustments. Thus, all stakeholders, who will be affected by the change as well as key stakeholders, suppliers in the supply chain, and various departments, need to be informed of the new system and provided with the necessary support and training.
Recognising long-term worth
When a company implements an automated AP system, it is investing in a technology solution that is designed to streamline and optimise the AP management process.
However, as the company grows and its AP needs change, it is important to ensure that the automated AP system continues to meet the company's requirements and provides ongoing value. This requires an understanding of the long-term benefits of the system, such as its ability to scale and adapt to changing business needs, its role in supporting compliance requirements, and its impact on the company's financial performance.
By understanding the long-term value of an automated AP system, businesses can ensure that the system remains useful and relevant as the company grows, providing ongoing benefits and value to the organisation. This can help optimise the AP management process and improve the company's financial performance over the long term.
Since there are many possibilities for AP automation, careful study is necessary to choose the best one for your business. Making an informed decision can be simplified by gathering data from relevant papers, benchmarking studies, or conferences. Maximising the advantages of AP automation technology requires a thorough understanding of AP systems, invoicing procedures, and payment instruments.
These initial automation measures pave the way for better financial management and workflow automation, enabling seamless invoice validation and approval processes, ensuring accuracy, and increasing efficiency in handling large volumes of invoices. By embracing these advancements, businesses can remain competitive in today's market.
Effectively manage your accounts payables with Infor SunSystems Cloud
Infor SunSystems Cloud is an innovative financial management solution that empowers businesses with a wide range of tools to effectively manage complex financial activities. With its user-friendly interface and adaptable features, it is the ideal solution for global enterprises and rapidly expanding companies seeking to streamline their accounting processes and enhance overall financial management capabilities.
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With Infor SunSystems Cloud, you have access to the necessary tools to successfully manage and simplify your creditors/payables accounts, providing valuable information to your organization and suppliers.
Watch our video below to see a demonstration of the payment run process in SunSystems.
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