In a perfect world, accounts payable management wouldn’t be that complicated. You’d get an invoice. You’d send a payment. Done.
But in the world of modern business, there is a multitude of factors you need to consider before finishing any transaction: Is there enough cash on hand to cover it? And if so, should you cut a check now or wait until closer to the due date? Was everything included in the shipment or completed in the service? Do you have an auditable trail of payment authorizations? Is the invoice total even accurate?
Answering these kinds of questions without introducing unnecessary payment delays is no easy task. But getting these answers wrong can leave you cash-strapped, disrupt your supplier relationships, and make you an easy target for fraud—which is why effective accounts payable (A/P) management is critical for your company’s overall financial health.
What is accounts payable management?
As the term would indicate, “accounts payable management” refers to the business processes and controls responsible for managing or overseeing a company’s accounts payable—the short-term debts that your business owes to creditors and vendors. These outstanding bills are typically accrued by purchasing raw materials, equipment, and services on credit.
In more detail, A/P management efforts tend to focus on tasks related to:
As A/P exclusively concerns itself with credit-based purchases, seeking and obtaining favorable credit lines is a key component of accounts payable management. And while risk assessments are routinely performed by the vendor, there are measures your business can take to make this process more seamless and improve your credit rating.
Your A/P management team will typically be the ones responsible for negotiating better payment options. This may mean obtaining bulk or early payment discounts or securing a longer payment window.
When you actually pay your bills can be just as important as actually paying your bills. Often, many organizations will delay sending out a particular final payment until the last moment, keeping the associated cash available for whatever needs the business might have. Or, as previously mentioned, some vendors might offer you a discount for early payment, meaning that your accounting staff may want to prioritize sending payments as soon as the invoice arrives.
Why does accounts payable management matter?
Effective accounts payable management—much like effective accounts receivable management—focuses on optimizing short-term cash flow and working capital. By controlling where your money is throughout the payment process and fine-tuning when transactions are finalized, you provide your business with more options. And you can better forecast your future cash standing.
At the same time, with flexible liquidity, your business can more easily mitigate funding shortages. And you sit in a much better negotiating position when discussing payment options with your vendors, such as extending payment terms, sharing risk, or prolonging warranty periods.
Further, with better formalized A/P management, you can promote more consistent, metric-driven operations—all while making your associated accounting staff more efficient. Electronic or automated processes, in particular, can easily accelerate your A/P-related tasks without incurring additional personnel costs.
Common A/P management issues
Conversely, ineffective processes can wreak havoc on your payment efforts, potentially alienating long-standing relationships and creating more work—and more headaches—for your staff. Some typical challenges you might run into include:
- Slow payments: The more steps you add as you formalize your process—particularly manual ones—the greater your chance to introduce potential delays or bottlenecks.
- Soured relationships: Once you begin manipulating payment timelines, you risk upsetting those vendors that experience corresponding delays, especially if these hit every payment.
- Inaccessible data: Effective accounts receivable management requires tracking much more than just invoices, but if those records are hidden across multiple systems and platforms, you can expect both annoyed employees and suppliers.
- Inconsistent procedures: If your staff uses an alternate processing strategy each time you pay a vendor, expect more verification requirements and reduced efficiency. Even worse, your workers might overlook common—yet critical—steps, like generating a unique order for each purchase.
- Conflicting priorities: Focusing too much on cash-in-hand might lead to late payments. And balancing timeliness and accuracy is no easy task, with one often being sacrificed for the other.
Tips for effective A/P management
With smart management being such a priority, you ideally want to establish centralized processes for your A/P efforts. If every incoming invoice is treated similarly, you can unlock process efficiencies and identify problems—or the need for exceptions—much more easily.
Tip #1: Talk early, talk often
Being on the same page with your vendors and any other creditors is critical for maintaining healthy business relationships. Long before your initial purchase order has ever been submitted, your accounts payable staff should be talking with the corresponding vendor, clearly outlining expectations and preferences. And keeping these lines of communication open throughout the relationship will help to reduce the likelihood of unpleasant surprises.
At the same time, transparency is the hallmark of effective communication. If your business is planning to delay a payment outside of your usual window to keep more cash on hand, let that supplier know ahead of time about the change.
Ideally, your staff will be so proactive in communicating that your vendors will never need to ask when to expect payment—they’ll already know. Alternatively, you can keep you and your vendors on the same page with a supplier portal, where interested parties can instantly look up relevant payment details, without human intervention.
Tip #2: Ditch the paper
An email or text will reach its recipient long before a traditional letter has even been picked up by a postal carrier. No matter the metric, electronic communication is much faster and more efficient when communicating with your vendors. So by shifting away from paper, you can automatically accelerate your A/P processes.
At the same time, physical paper requires physical storage, meaning that you’ll need to dedicate a healthy amount of floor space for filing cabinets or document boxes. And when compared to electronic files, paper records require much more effort and energy to search through and compile for reports.
Tip #3: Delineate priorities
Accounts payable managers typically oversee a broad range of tasks, from forecasting cash flows to verifying order accuracy to negotiating with suppliers. And with so many competing focuses, it’s easy to overlook critical issues that could affect your company’s finances or reputation.
Effective accounts payable management navigates these overlapping demands by establishing centralized controls and reporting systems that inform key decision-makers with accurate, timely data. With all of the relevant facts available in one place, all of the necessary considerations can be accounted for when prioritizing or adjusting payment cycles.
Tip #4: Create benchmarks
Once you have established clear, repeatable processes for every step of the A/P cycle, you can much more easily report on and track performance across departments, teams, and individual workers. And with this information at hand, you can begin prioritizing critical tasks and identifying inefficiencies.
Do certain accounting staff need more training regarding proactive communication? Is payment authorization from one of your executives taking too long? Should your sales department be ordering supplies so frequently, or would it make more sense to make larger bulk purchases?
Similarly, you should be monitoring the comparative performance of your suppliers: Are deliveries on time? What are the defect rates for received materials? Does each vendor offer the same economy of scale?
With established benchmarks and corresponding governance models, your accounting staff is much more likely to notice anomalies, helping to reduce incidents of fraud or inaccurate payments.
Tip #5: Automate your accounts payable processes
If you can remove the human component from your A/P efforts, do it. Even though your employees are likely attentive and hard-working, any manual processes that your business relies on are subject to unintentional human error. And the more touches an invoice has, the more that risk increases.
At the same time, automation allows you to accelerate the payment cycle, cutting out unnecessary delays. For example, an automated platform can readily accommodate multiple invoices and transactions simultaneously, while a human would need to handle these operations one at a time.
Your staff will also become much more productive. By offloading repetitive, time-consuming tasks to the technology, your human workers can instead focus more on customer relationships and other strategic efforts. And as your operations grow, you’ll likely need to hire fewer additional employees since the automation platform will be handling the heavy lifting.
Finally, an automated accounts payable management process greatly reduces your risk of being late on—or plain forgetting to make—payments to your suppliers. Most automation platforms empower you to schedule out transactions in advance, so the technology makes sure that your payments are always on time.
Invoiced: Effective accounts payable management
Properly balancing your A/P priorities requires consistent, centralized operations that can weigh all relevant concerns and make smart choices quickly and efficiently. And a key component of this balance is freeing up the availability and accessibility of payment-related data. But just having this information at hand isn’t enough.
To take your accounts payable processes to the next level, you also need to employ strategies that will trim out unnecessary delays and accelerate the collection, handling, and analysis of these critical records—ideally faster than humanly possible.
If you’d like to unlock the power of automation within your accounts payable management processes, check out the recently-launched Invoiced A/P solution. Schedule a demo today and make monotonous, time-consuming A/P a thing of the past.