In any company, many moving parts must mesh well together to create positive business outcomes. Breaking down the myriad responsibilities within a business into separate departments is the best way to ensure every critical task receives the attention it deserves. Instead of micro-managing every daily task, coordinating the functions of these departments and their communication becomes the primary executive focus.
Among the many departments in a typical business, one of the most critical for daily work is the accounts payable department. From small business to major enterprise, every organization has concerns and procedures surrounding AP to consider. What does accounts payable do, and how can it function most effectively within your business?
We delve into the details:
- What is Accounts Payable
- What is the Role of the Accounts Payable Department?
- What is the AP Process
- The Importance of Your Accounts Payable Department
- Ways to Organize Your Accounts Payable Department
- Running an Efficient Accounts Payable Department with AP Automation Software
- Effective Structures for an Accounts Payable Department
What is Accounts Payable?
Accounts payable simply refers to the process of managing and paying for goods or services purchased by a business on terms of credit. For example, a widget supplier might agree to sell your company 1000 widgets at 5 cents per widget on NET 30 payment terms. Your business receives the widgets and then must provide payment for the received goods within 30 days of receiving the vendor's invoices.
Your "accounts payable" therefore represent the monies your business owes to third parties on a short term basis. This contrasts the "accounts receivables" held on your balance sheet, which track how much money your business is owed by its customers. Proper management of both accounts payable and accounts receivable is essential for controlling your cash flow.
What is the Role of the Accounts Payable Department?
It could be easy to think that the entire purpose of AP is simply to make payments on time. However, the reality is that there are many steps involved in even a single purchasing transaction. Even in a medium-sized business, AP might have to contend with hundreds of transactions on a weekly or monthly basis. The numbers — and the data involved — only grow more staggering as you scale up.
Thus, there are several tasks that the accounts payable department handles in your business beyond authorizing payments before incurring late fees. Some of the other critical accounts payable department responsibilities include:
- Sourcing appropriate vendors and selecting the business that can provide goods at the best prices.
- Maintaining vendor relationships and exploring opportunities for savings and discounts.
- Producing receiving reports to determine vendor compliance with PO terms.
- Correcting problems in invoice data and meeting daily business obligations.
What is the AP Process
Let's quickly consider a basic version of the process that plays out when your business needs to make sure its upcoming invoices are paid. How does AP handle the "procure to pay" pipeline that supplies your company with everything from pens and paper to critical raw materials or in-demand services? We can break the process down into three steps: purchase, receipt, and invoice.
- Your business decides it needs to buy more widgets from a supplier it has used in the past. Accounts payable creates a purchase order and updates the general ledger to reflect the purchase. Once authorized, the PO goes to the vendor for fulfillment.
- The goods arrive at your business, and employees check the received products against the PO. AP follows up with suppliers to correct any mistakes or notify them of exceptions that may impact the invoiced price.
- The vendor invoices your business, and AP stewards the invoice through the payment process. AP performs a three-way match to unify information across all three stages, then seeks appropriate management approval to remit payment.
The Importance of Your Accounts Payable Department
Proper management of AP is vital for the most fundamental reasons — you have to meet your financial obligations, and your business needs the materials. However, a highly functional and modernized AP department is also a vital asset for other reasons.
Consider what can happen when the accounts payable department suffers from inefficient processes:
- Late fees caused by violating payment terms and allowing accounts to remain overdue.
- Strained vendor relationships caused by inconsistent payment, which can impact future service quality.
- Inventory and stock problems due to POs filed too late or not transmitted at all.
- Errors impacting your bottom line, such as double payments.
Ways to Organize Your Accounts Payable Department
How can you organize an accounts payable department structure that makes sense and contributes to effective operations? While the actual hierarchy you choose to implement will vary based on available talent and payroll, there are other steps to take. A few ways companies can organize an effective department include:
- Providing staff with a clear chain of command regarding duties and responsibilities. Overloading one or two AP employees with most of these tasks is a simple way to create problems for the business.
- Embracing paperless processes. It is easy to lose, destroy, or otherwise mishandle paperwork that remains in hard copy. By organizing your department around all-digital procedures, you can streamline much of the AP cycle.
- Centralizing operations and making data more accessible. When a clerk needs to reconcile an invoice with an old purchase order, how long does it take them to find the right paper? When someone needs to see how the unit cost on an invoice compares to historical payments, can they find that data? Building a repository of your AP data is vital for an effective department structure.
Running an Efficient Accounts Payable Department with AP Automation Software
With so many challenges facing the accounts payable department, inefficiencies are bound to develop. Common errors, such as data entry mistakes, mismatched purchase orders, and clerical oversights, can all lead to negative financial impacts for the business. Businesses at any scale could benefit immensely by considering how to transform this department into more of an automated system.
With fewer human hands touching each transaction, there aren't as many opportunities for costly errors. More importantly, the entire process of recording and acting on AP information can become faster. With AI and machine learning-powered tools, accounts payable can easily step into the 21st-century marketplace. Even smaller businesses can benefit when they automate accounts payable.
Tools for automatic invoice processing by Kofax can transform the data capture process, while automated accounts payable solutions create an all-digital pipeline for many of your transactions. With AI-powered software at your disposal, building custom workflows that align with your particular AP needs is easier than ever.
Effective Structures for an Accounts Payable Department
A final area to consider is how to create a structure for the department that supports better results in and of itself while reducing the risk for fraud. This consideration is challenging for any business, but especially small and growing companies that cannot easily rely on segregating duties between multiple employees. As a result, AP could be a source of ongoing concern and even a potential financial leak.
Separating the duties of those involved in the upstream and downstream portions of the P2P cycle is one way to structure your department for less risk. Investing in automation tools while implementing rigorous internal controls can enhance confidence and provide peace of mind for management. With robust reporting and ERP integration, your teams can enjoy a safer yet more effective department structure.
An efficient and well-organized accounts payable department is a critical asset for any business. With so much information flowing through the department and so many financial obligations attached to that data, a good structure is essential. So too is a clear understanding of the best practices required to operate AP departments.
By investing time in learning not only how to set up your accounts payable team for success but also what solutions will help them most, you can enjoy many benefits. From finding new savings to strengthening relationships with vendors, the outcomes can put your business in a better place to succeed.
Explore further information about how a better departmental structure and advanced software tools can transform your company's accounts payable functions into a source of value. Request a quote matched to your business's needs by Kofax today.