Reliable accounting practices are an essential element not only to long-term success but to meeting short-term goals, too. Maintaining accurate books and clean ledgers isn't only about staying on top of your company's day-to-day cash flow. With the appropriate steps and the right insights, it is possible to transform these efforts into money-saving and value-generating elements of your business, too.
The full-cycle accounts payable process is one such area businesses can target for improvements. "Full cycle" here refers not just to the basic process of creating and paying for orders but all the steps in between. That includes document creation, coding, reconciliation and more. Before you can begin looking for ways to refine how your company handles AP, however, it is crucial to have a full-scope understanding of what AP is all about.
In this guide, we'll explore the most common terms related to the entire accounts payable cycle, then explore the process from end to end. With a clear overview of how these functions work in small business and major enterprises, we can then identify core areas for possible improvements. We will delve into the following:
- Breaking Down the Accounts Payable Cycle
- General AP Procedures: What Is the Accounts Payable Process?
- The Flow of Full-Cycle Accounts Payable
- Technology Delivers More Control and Value During the Full Cycle of Accounts Payable
- The Benefits of Optimizing Your Full-Cycle Accounts Payable Workflows
- AP Automation Software for Your Workflows
- The Bottom Line About Accounts Payable
AP is all about how your staff handles transactions and pays for the products and services the company needs — but how does it all work? Let's break down the basics.
Breaking Down the Accounts Payable Cycle
Accounts payable is a broad term that can apply not only to transactions with external vendors but internal accounting matters such as expense account charges and more. To keep things simple, we'll focus exclusively on vendor transactions in this guide. However, many of the same principles apply to petty cash expenses.
First, consider the big picture of what's involved in the accounts payable process and its steps. The full cycle of AP is simple if you distil it down to its elements: your business places an order, it receives the order and it pays for the order. In more detail:
- The business creates a purchase order, or PO, for goods or services provided by a third-party vendor. The PO sets out information such as quantities of materials, types of services to be used, dates for when to fulfill the order, and the acknowledged price of the order. Every PO is a contract between your business and a vendor to exchange cash for their products.
- The business takes receipt of purchased items upon delivery and creates a receiving report. Staff carefully examine shipments, comparing them to the original PO. The receiving report's purpose is simple: guarantee that all the requested items arrived and in the appropriate condition. Damaged or missing goods require follow-up with the vendor for replacement or account credits.
- Finally, your business receives the vendor invoice some time after taking receipt of the goods. The vendor lists what their records indicate they sent, the price per unit, and your total cost. All this information will go into various systems within your AP system. However, before you pay the invoice, another step must take place.
The Three-Way Match
When a business receives the final invoice from a goods or services vendor, payment isn't automatic. If it were, there would be a very high risk of overpayment—or even potential exposure to fraud. Instead, the AP team performs the "three-way match" process at this stage. Think of it as a method of double-checking all the work done previously to make sure everything is in agreement.
In a three-way match, AP must compare the original purchase order, the receiving report, and the vendor invoice side by side. Noting any new deviations, the matching process must also consider any exceptions generated during receiving phase. AP must then decide which exceptions warrant further investigation and reconciliation and which are not serious financial or clerical errors.
General AP Procedures: What Is the Accounts Payable Process?
The above describes an overall view of the accounts payable workflow, but what about more of the detailed operations that take place on a daily basis? Here's a quick overview of some of the responsibilities overseen by those handling the AP process.
Setting Up Vendors and Tracking Accounts
Some of the most basic tasks in the accounts payable workflow are also the most important. These efforts include:
- Creating and maintaining AP ledgers
- Setting up vendor accounts within the AP and/or ERP system and maintaining accurate lists of vendors, their payment terms, and due dates (e.g., NET 15, NET 30 terms)
- Creating and tracking purchase orders
- Acting as liaison between business and vendor
Capturing Data and Making Payments
AP must also handle lots of information flowing into the business too. These processes comprise:
- Coding invoices for correct placement into ledgers
- Reviewing information gathered during receiving
- Scanning documents and entering data
- Reviewing and matching records
- Sending invoices for payment authorization
Exact procedures vary from business to business based on accounting methods. Large companies also often have many moving parts in play with flurries of POs and invoice activity across multiple locations. However, most will still carry out an AP process similar to this description.
The Flow of Full-Cycle Accounts Payable
AP is about more than just making sure your inventory levels stay topped up, and your vendors are happy with on-time payments. The end-to-end AP process is also a vital component of the "procure to payment," or P2P, pipeline. The functions of your purchase department concern both "upstream" processes and "downstream" workflows. What are these?
"Upstream" processes simply refer to the efforts involved in procurement itself. This process includes locating the vendors that can supply your business with the appropriate products or services. More importantly, it also focuses on developing strong relationships with third-party companies and creating mutually beneficial contracts.
Good upstream process management is an essential part of the full cycle of accounts payable. With it, a business can trust that it assigns every PO to the vendor that will deliver the best price, quality and delivery terms.
"Downstream" processes encompass everything that occurs after the business buys anything. In this phase, the AP department is responsible for confirming the receipt of goods and the relevant vendor invoice tied to the PO. Tracking invoices and ensuring they receive the proper authorizations for payment are also downstream processes.
In many AP departments, downstream processes can be a choke point where the business loses valuable time. Inefficiencies in business processes can compound and create costs at this stage, even in well-run departments. When not appropriately managed, poor AP processes can negatively impact vendor relationships, cause missed payments and even incur late fees.
Technology Delivers More Control and Value During the Full Cycle of Accounts Payable
Although the full-cycle accounts payable process is straightforward in overview, the reality is that it is a highly complex undertaking with many moving parts. A large business could need to handle hundreds or even thousands of invoices weekly. With so much data passing through so many hands, there are many opportunities for mistakes.
New technologies can now provide businesses with advances in several key areas that can make help AP add even more value to their work. What's new?
- Accounts payable automation, including capturing invoices automatically, automating key workflows and de-siloing data through ERP integration.
- Intelligent invoice automation, such as AI-based classification and data extraction.
- Purchase order automation, keeping your business well-stocked without shortages caused by human error.
The Benefits of Optimizing Your Full-Cycle Accounts Payable Workflows
Many businesses have entrenched AP workflows, especially long-running companies with well-established departments. Swapping to new workflows and adding different technology into the mix requires a careful risk evaluation, but there are also many benefits to consider. How can effective automation of the full cycle of accounts payable lead to better results for a business?
- Reduce or eliminate manual handling of invoices. Limiting the number of touches a document requires cuts down on many opportunities for errors, such as misfiling or loss.
- Automatically track debits and credits, leading to cleaner ledgers and more easily verifiable numbers.
- Eliminate data entry bottlenecks and dramatically reduce errors created by manual processes, further speeding up workflows.
- Avoid issues that cost the business real money, such as lost invoices or double payments.
- Reduce risk in the approvals process, creating a digital "paper trail" at every step of the way. Ensure every invoice receives a review from the appropriate individuals.
AP Automation Software for Your Workflows
Leveraging automation technology for your business requires choosing a software vendor that understands the demands facing the modern AP department. More than that, it is essential to select a partner that has made clear investments in the technologies necessary for successful automation of AP, such as machine learning and artificial intelligence.
With Kofax software solutions, businesses can transform the full cycle of their AP process while unlocking new opportunities simultaneously. With best-in-class accounts payable automation and AI-powered invoice automation, it’s easy to transform the entire cycle from upstream efforts to the day-to-day downstream work.
The Bottom Line About Accounts Payable
The accounts payable process has traditionally been viewed mainly in utilitarian terms. AP existed to serve the business's supply-based needs and to meet its obligations to, and as created, by other departments and processes within the company. Although this remains its core function, it should be clear that this function can generate value for the business in and of itself.
With AI advancing by leaps and bounds, new tools can transform the full-cycle accounts payable process into a source of value and savings. At the same time, the increased accuracy and speed of processing reduces failure points, decreases the risk of fraud and puts more current data in the right hands across the company.
By modernizing the AP department, businesses can tap into a broad range of benefits without significant negative impacts on existing procedures. With the pace of doing business only getting faster, there are other reasons to invest in AI automation, too. Increasing agility in AP could be a substantial asset in building up your competitive edge for the future, helping you accelerate past the competition.
By looking at these processes with a fresh view toward new technologies, you can structure your AP department for long-term success no matter where your organization is on its digital transformation journey.