Accounts payable refers to the amount you owe your suppliers for the goods or services you’ve purchased from them on credit. Paying attention to your accounts payable process is crucial — if anything goes wrong in your accounts payable process, your entire business will be in jeopardy.
Let’s say your vendor delivers the goods you had ordered and upon delivery you notice that they have charged you more than the agreed amount. To prove them wrong, you search for the corresponding purchase order, but you don’t find any! It turns out that one of your employees skipped the process of issuing purchase orders, because getting them approved is time-consuming and they didn’t want to miss out on the early discount the vendor was offering. Now you’re stuck in a dilemma: should you pay the vendor or not? One small mistake can mess up your accounts payable system and your relationship with your vendor.
Your accounts payable process has a significant impact on your business’ cash flow. Streamlining your accounts payable process also helps you maintain good relationships with your vendors, which can work to your advantage. If you haven’t found the perfect workflow for your accounts payable process, read on to learn about some common problems and how to solve them. When it comes to accounts payable, there’s always room for improvement.
Common accounts payable problems
Here are some challenges and issues that affect businesses’ accounts payable processes:
Manual data entry
A typical accounts payable process involves entering the details of a vendor invoice, getting it approved, and then completing the payment. If manual data entry is involved in each step, there’s an increased possibility of errors, which can lead to incorrect calculations, incorrect payments, and a rippling negative effect on your business’ finances. To find and rectify errors, you’ll have to go through your spreadsheets manually until you spot them. That wastes a lot of time, which could be put to better use.
Managing vendor invoices
When you have a lot of purchase transactions and incoming invoices from your vendors, it’s pretty easy to lose track of the invoices and their due dates.
Once you notice that you’ve lost an invoice, you can talk to your vendor and get them to re-send it. However, this only works if you notice the missing invoices. What happens if you’re unaware of a lost invoice? You might only find out about it when you get a call from your supplier demanding immediate payment. Those calls can wreck your relationship with your vendors, reflect very poorly on your business, and affect your audit readiness.
Missing purchase orders
Generating purchase orders is important, because they help you avoid duplicate orders and unauthorized purchases. Purchase orders also allow you to track what items you’ve ordered, and the purchase amount you had agreed upon. Many business owners skip the purchase orders, saying it’s difficult and time-consuming to create them manually.
Problems in vendor management
Maintaining good ties with your suppliers goes a long way! Late payments are an easy way to lose a vendor’s trust and miss out on perks like flexible payment terms and short-notice ordering. If your business uses manual processing, you may end up spending a lot of time to manually follow up with your vendors and repair damaged business relationships.
Slow and inefficient processing
Manually processing your accounts payable can be time-consuming, and if your internal process isn’t efficient, the results can be less than desirable. For example, in a medium-sized company, you may have two or more staff members who need to approve a vendor invoice before the payment is processed. If they need to send the invoice around by hand or by email, those approvals will take time. By the time the invoice is paid, you may have missed an early-bird discount or even accrued a late payment penalty.
Apart from late payments, there is also the chance of unauthorized purchases if you have an inefficient internal process. Failing to set rules about what goods and services to purchase, how much should be spent, and who should authorize the purchases can severely affect your business finances and disrupt your budget.
Payment errors
Watch out for duplicate payments! Suppliers will often send a second invoice if the first one hasn’t been paid off quickly, and you can mistakenly end up paying for both. If you own a business that operates from multiple locations, there can be confusion about which location is paying which vendor invoice. Duplicate payments negatively impact your cash flow, and unless you can single out the duplicate payment from your records and initiate a refund from your vendor, your money will be lost forever.
Maintaining manual records
According to a study by CFO, manual processing of paper invoices adds about 62% to a company’s labor costs. A typical purchase transaction generates two documents — the vendor invoice and a purchase order — but that number can easily increase for special circumstances. As your firm scales up, so will its purchase transactions and the number of documents it has to handle. Now you face two problems: storage cost and difficulty in tracking your documents.
If you were asked to retrieve an invoice from last month, would you be able to do it quickly? It’s not like finding a needle in a haystack; it’s more like searching for a particular needle in a needle stack. Even if your record management is spotless, you’ll still find that storing, retrieving and updating records is tedious and time-consuming. Paper records are also vulnerable — you don’t want to have to tell your suppliers or auditors that your dog ate the invoice or a fire destroyed it.
Best practices and solutions for your accounts payable process
If your accounts payable process is complex, error-prone, and overwhelming, it’s time to work on making it better.
Automate your accounts payable process
There are solutions to each problem described above, and the common factor in all of those solutions is automation. Automating your accounts payable process will improve its quality, accuracy, and speed. With manual processing out of the picture, you can stop losing invoices, making late or double payments, or finding yourself with a negative cash flow.
Firstly, you can bid goodbye to manual data entry and errors. If your suppliers provide the option, always choose digital invoices so that you can import them directly to your accounting software instead of manually entering the details. If you use accounting software that comes with a scan-and-pay feature, you can snap a picture of the vendor invoice and upload it to captured as a purchase transaction.
Most accounting software also provides automated payment reminders, which eliminates the possibility of late or forgotten payments. This ensures that you never lose a vendor invoice, and helps you can avoid duplicate payments by keeping track of your paid and unpaid vendor invoices. Reduced manual data entry equals reduced errors.
Don’t skip purchase orders
Using accounting software makes creating purchase orders much quicker. Most software also allows you to convert the purchase order to a vendor invoice, and instantly match your vendor invoices to their purchase orders, instead of scrambling to find the correct one from the pile.
If your software allows, make it mandatory to issue purchase orders for purchase transactions. You can then use the purchase orders to review the orders and invoices you receive from your suppliers.
Vendor management
Make sure you choose good vendors and check their efficiency, how quickly they accept orders, and if they’re willing to negotiate payment terms and prices. You should also set aside some time to review your contracts and service level agreements and make sure they’re being honoured.
Having a vendor portal where you can record and save vendor details including contact information, invoices related to purchase transactions, and credit and debit notes helps you manage your vendor relationships. You can regularly update payment terms and discounts, and allow vendors to check the status of their invoices, payments, and deliveries. This keeps the lines of communication open without the need for manual follow-up on both sides.
Design an efficient and streamlined workflow
Every purchase transaction should be smooth and hassle-free from issuing the purchase order to completing the payment. Automating your accounts payable by investing in accounting software helps you streamline the entire workflow, including issuing purchase orders and getting them approved, reviewing the invoices received from vendors, and making payments. When approving purchase orders and vendor invoices takes a few clicks instead of hours or days, your accounts payable team can double their productivity.
Automation can simplify complicated internal processes and reduce delays in approval. It helps you keep up with your purchase orders and vendor invoices, pay your vendors on time, and avoid late fees. Most importantly, automation can adapt to the processes that work best for your business. If you’ve designed a workflow that meets your needs, automate it!
Keep digital records
By switching to online accounting software, you can maintain digital records for all of your transactions. You can also save on storage costs and make it easier to store, search, and retrieve documents.
In particular, digital records that are stored in the cloud offer security and regular backups. This improves your legal compliance as well, since most countries require business owners to store their business records for a specific number of years.
Here are a couple of bonus tips that are guaranteed to help you improve your accounts payable process:
Prioritize your vendor invoices to take advantage of early-payment discounts
Choosing the vendor invoices you want to pay off first, instead of paying on a first-come-first-served basis. Some suppliers have strict payment terms and are likely to charge interest or late fees. Take note and pay them on time to avoid paying extra. Other suppliers offer early-payment discounts, so paying them off first can help you owe less overall.
Always review your vendor invoices and check the items, amount, and price
It’s always better to wait to pay your vendors until after you’ve received the products or services. That way, you can match the vendor invoice details with what has been delivered. If you’ve placed an order for 45 items, check if all 45 items have been delivered before paying the invoice amount in full.
Here’s your takeaway
If you’re facing issues resulting from disorganized accounts payable processing, now is the time to take proactive measures. One late payment can spiral until you end up losing vendors and contracts. Paper records and manual processing make it harder to notice payment errors like duplicate payments and incorrect data entry. When errors occur, they can be handled individually for a while, but it’s only a matter of time until they combine to affect your cash flow.
Having an automated accounts payable system in place can keep that from happening. Automated systems built around online accounting software bring order and efficiency to your accounts payable processing. By implementing a streamlined process, you can reduce errors and spend your time building business relationships instead of repairing them.