Pop quiz: do you know exactly who you need to pay and when? Is your accounts payable process smooth and seamless or are you constantly hunting down invoices in multiple inboxes?
For small business owners, having a proper accounts payable workflow for receiving, approving and paying invoices gives you a bird’s-eye view of all your outgoing payments and helps you make more informed decisions about your cash flow.
An inefficient accounts payable process means time wasted collecting and categorizing invoices, and getting stuck with busy work. This is time that could be spent building and growing your business.
Plus, if you’re struggling to make payments on time, this means bad news in the form of additional interest or fees and strained relationships with your vendors and creditors.
Not having a proper handle on cash flow is one of the reasons why 82% of small businesses fail within the first five years. While there are a number of ways small businesses can improve cash flow, setting up an accounts payable process flow that streamlines this for you is one of our top ones.
Plus, it’s easy and only needs to be set up once, then just set on repeat.
In this article, we’ll dive into how to set up an end-to-end accounts payable process and workflow to improve your business.
TABLE OF CONTENTS
- What is the cycle of accounts payable?
- What is a workflow in accounts payable process?
- How to set up a full cycle accounts payable process
What are accounts payable?
Accounts payable (AP) is the amount of money your company owes vendors or creditors for goods and services. The total accounts payables are the sum of your invoices and short-term debt.
These will be listed as liabilities on your balance sheet because this is money expected to flow out of your business within a certain period of time, depending on the payment terms from your creditors and vendors.
Depending on how you choose to manage your cash flow, you can either make payments on your accounts payables as close to the due date, or earlier in order to take advantage of potential discounts – more on that later
What is the cycle of accounts payable?
The cycle of accounts payable is when a invoice is paid after 30 days but before 60 days. The reason why this happens is because invoices are usually paid within 30 days. However, sometimes invoices need more than 30 days to be paid.
What is a workflow in accounts payable process?
A workflow refers to the order in which tasks are performed when processing a vendor invoice. It's important to understand the workflow because it will determine whether invoices are paid quickly or late.
What are the step of the accounts payable process?
Let's examine the end-to-end AP process. Having a solid workflow that helps you verify, enter, approve, pay and reconcile all of your transactions will save you time and money over the long run.
Step 1: Receive the Invoice
The first step is to be aware of what it is you owe money for. You'll do this by gathering your arrival documents into one place.
In most cases if you're a small business, you'll be receiving invoices directly from each of your vendors so you only have one arrival document to note, but if you have multiple departments, or an accounts payable department, that is responsible for creating purchase orders (POs) or receiving the goods once delivered from the vendors, be sure to coordinate with them to ensure you have all the documentation from them as well.
Step 2: Review the Invoice
Before you enter a vendor's invoice into your system, you'll want to verify everything on the invoice is correct so you'll perform what's called a three-way match.
A three-way match is an audit for consistency against the original purchase order, the receipt for goods or services delivered and the invoice itself. This is done to minimize losses due to errors on the invoice, duplicate payments or invoices that were sent to you fraudulently.
If all three documents line up, then you can move the accounts payable process along to approval, but if there's a variance – like the wrong quantity of an item delivered or an incorrect price – you'll need to investigate the discrepancy with your vendor before processing the payment. This keeps you and them safe.
If you are looking for a way to improve cash flow, you can also work with your vendor to negotiate the payment terms of the invoice. While many small businesses may be reluctant to negotiate longer payment terms in fear of inconveniencing or losing suppliers, the longer payment terms could potentially free up more cash for you to run your business, especially if you're unsure where the next revenue source is coming from.
Step 3: Approve the Invoice
Next, it's time for invoice processing through approvals. If you're typically the only one to enter in all your accounts payable, you can approve invoices as you see them, but if you employ an accounting clerk, an ap department, or have other members of your team that need visibility into those approvals, you can provide them with specific permissions and guidelines on how to properly assess and approve an invoice.
This can be done with an accounts payable integration with Plooto where you have control over user permissions, the approval process and the ability to approve invoices in bulk.
Step 4: Create a Chart of Accounts
Now you're ready to enter all your vendor and invoice details. It all starts with the chart of accounts – the place where you will keep track of all your accounts payables in one place. It helps keep you organized, gives you wider visibility into your business' cash flow and enables you to post payments to the correct accounts.
Most accounting software will include a chart of accounts by default, so be sure to keep these updated with all your accounts in order to properly track your accounts payable workflow.
Step 5: Pay Vendors and Suppliers
Your chart of accounts and accounts payable software will be able to sort your invoices by due date so the last step here is to hit “send” on those payments.
Remember that paying bills late ruins relationships, incurs fees and may lead to cash-on-delivery demands – or discontinuation of service.
Whichever way you like to make your payments – by check, credit card or electronic payments – your accounts payable software will help you keep your payments on time.
If paying by check, include a copy of the invoice for context, or at least the invoice number to make sure the payment gets posted properly. If paying by credit card or electronic payment, it's always helpful to notify your vendor that payment is on its way.
Step 6: Reconcile with Accounting
Once payment is sent, the invoice is ready to be marked as paid in your finance system, and can be made even easier by automating reconciliation with your accounting software. This reconciliation marks the final step in the accounts payable cycle.
Solutions like Quickbooks and Xero can keep your balance sheet accurate and automate any follow ups required. They won't take care of receiving and making payments, but using a payments integration like Plooto will save a ton of time on manual entry once payments are made and received.
An automated payment platform that auto-reconciles the books in your accounting software is worth its weight in gold, because it means all relevant accounts payable and accounts receivable entries in your ledger — current assets and liabilities — will be kept up to date the moment payments are made.
Bonus: How to Get a Discount
While late payments will only lead to complications, early payment could potentially lead to discounts and stronger relationships with your vendors and suppliers.
For example, if you receive an invoice with payment terms of Net 30 and the invoice is dated for December 31, your payment on that invoice is due by January 14 at the very latest in order for it to be on time. But, a payment term commonly used by vendors is 2/10 Net 30, which means if you pay the invoice within 10 days, you can apply a 2% discount off the amount due. So, you'd pay the invoice by December 24 in order to receive that discount.
Remember to keep an eye on your cash flow though, and only pay invoices early if you can afford to do so without risking missing a payment later.
Inquire with your vendors if they offer discounts on early payment and keep track of them all within your accounts payable software.
How Can Software Help with the Accounts Payable Process?
- Proper enforcement of payment processing rules
- Visibility of the status of your accounts
- Elimination of manual tasks
- Integrations with your tech stack
The accounts payable process can be managed by an administrator or clerk on your team, outsourced to a third-party company that specializes in accounting, or it can also be managed through the right software solution.
Here’s how software could help you with the accounts payable process.
Proper enforcement of payment processing rulesOne of the keys to an accurate accounts payable process is to have checks and balances to ensure the appropriate tracking, approval and payment of invoices.
Visibility of the status of your accountsKeep a bird’s-eye view of all your accounts, when their payments are due and more all from one place for easy analysis and payment.
AccuracyEliminate errors in manual entry or oversight by having your software solution track invoice details and highlight incorrect or duplicated information.
SpeedWith all actions happening in one platform, you can verify, enter, approve, pay and reconcile your invoices faster and in real time.
Elimination of manual tasksAutomation will eliminate the need to enter vendor and invoice details manually, freeing up time and resources to focus on other aspects of your business.
Integrations with your tech stackSmall businesses use dozens of software solutions to successfully operate. Having them integrate seamlessly means being able to keep better track of every aspect of your operation, without clunky cross-communication.
How do accounts payable and accounts receivable work with one another?
You can’t have one without the other – accounts receivables and accounts payables are two sides of the same coin.
On the one side, your accounts receivable is a current asset on your balance sheet because it's money you'll soon be receiving from customers or clients. On the other side, your accounts payable is a short-term liability on your balance sheet because it's money you owe to vendors and creditors.
3 ways accounts payable and accounts receivable work together
- Management of cash flow
- Informs accurate financial projections
- Ensures good audit trails
Since these important processes help manage money in and money out, it’s helpful if the two work hand-in-hand to:
1. Management of cash flow
While your business is founded on your vision, you’ll need actual money to make that vision a reality, so accounts payable and accounts receivable track the rate of which cash is flowing in and out of your business.Both your accounts receivable and accounts payable processes are intrinsically tied to your cash flow and will help you spot problems before they become actual problems.
2. Informs accurate financial projections
Once you’ve implemented accounts receivable and accounts payable automation processes, you’ll be able to anticipate cash flow trends and make more informed financial projections.For example, an accounts receivable process will allow you to anticipate bad debt (unpaid invoices) for the next year based on what happened in previous years. Without an ongoing, accurate view of your accounts receivable and payable, your revenue projections will be a best guess.
3. Ensures good audit trails
Every company in the U.S. and Canada – from SMB to Enterprise – is required to keep an audit trail, which is a set of documents and records that demonstrate the financial activity of your company.
Accounts payable and accounts receivable are both forms of comprehensive documentation on the cash flow of your business and while no one wants to get audited, it will always remain a possibility. Having an ongoing accounts receivable and accounts payable process can make the audit process much less painful.
How to set up a full cycle accounts payable process
- Decide who will manage your accounts payable
Accounts payable can be managed by an administrator or clerk on your team, outsourced to a third-party company that specializes in accounting, or it can also be managed through the right software solution.
- Gather your arrival documents into one place
Collect all invoices you need to pay directly from suppliers or the departments that are responsible for creating purchase orders and keep in one place for reference.
- Review the invoices
Performing a three-way match between the purchase order, the goods and services that were delivered and the invoice itself will help verify the accuracy of the invoice and avoid errors like paying a fraudulent invoice.
- Set up an approval process
Identify all parties that will need to approve any invoice and set up a system to communicate when invoices require their signatures.
- Create a chart of accounts
Once approved, enter all supplier invoice details into one system that keeps track of all your accounts payables. This keeps you organized, gives you wider visibility into your business’ cash flow and enables you to post payments to the correct accounts.
- Take advantage of discounts
Investigate each invoice for payment terms that may include discounts for early payment and only pay if you can comfortably do so without risking your cash flow.
- Pay vendors and suppliers
Process payment in order of due date according to the payment terms, typically done through check or wire transfer.
- Reconcile the invoice with your accounting software
In order to keep an accurate recording of your balance sheet and manage cash flow, sync the details of each payment with your accounting software.
Many accounts payable automation platforms have native integrations with common accounting services like Quickbooks and Xero.
Ready to get started?
By having a firm understanding of the accounts payable workflow, you’ll be able to keep all of your out-going money organized, accurate and on time, while eliminating the risks of errors and strained relationships with your vendors.
Integrating with an accounts payable software solution like Plooto will make all of this much easier.
03 How to Set Up a Full Cycle Accounts Payable Process and Workflow