Companies that establish accounts payable best practices increase the visibility of information, reduce their invoice processing time, save money, strengthen internal controls and cash flow management, reduce fraud and errors, and improve vendor relationships. Accounts payable best practices are a subset of accounting best practices. Businesses using best practices in accounts payable processes and accounting gain a substantial competitive advantage.
According to the Ardent Partners annual report, “The State of ePayables 2023: Paving the Way for a Smarter Future”:
“The ability to process invoices straight-through is another area where the Best-in-Class organizations demonstrate their prowess. While only 29% of the All Others possess this capability, a strong 69% of the Best-in-Class organizations can process invoices without manual intervention, the elusive “holy grail” of invoice management.”
Top Best Practices for Accounts Payable
The top 10 accounts payable best practices are:
- Streamline AP processes and accounting integration.
- Use an intelligent technology-driven, paperless AP automation system for straight-through invoice processing.
- Implement strong internal controls and exception flagging.
- Onboard vendors and automate status notifications through a vendor portal.
- Automate digital 2 or 3-way matching of invoices with purchase orders and receiving documents.
- Use automatic AP invoice approval processes.
- Optimize electronic payment methods.
- Maximize early payment discounts.
- Reconcile payments and accounts payable balances to the general ledger.
- Optimize visibility, metrics, business intelligence, and real-time AP reporting.
1 – Streamline AP Processes and Accounting Integration
Streamline AP process workflows with paperless AP. An AP automation system has ERP or accounting system integration. AP automation software will help your company achieve its accounts payable invoice processing best practices goals through built-in best practices for accounts payable and automated AP workflows.
Benefits:
Gain efficiency and prevent bottlenecks through streamlining of accounts payable workflows. AP automation with ERP integration eliminates the need for extra data entry into an accounting system because the data is synced between systems.
2 – Use an Intelligent Technology-driven AP Automation System
A cloud-based, modern AP automation system driven by artificial intelligence (AI), machine learning (ML), OCR (optical character recognition), and rules-based robotic process automation (RPA) for automating repetitive tasks will be the backbone for implementing many of these best practices in accounts payable in your business.
Stakeholders using the unified AP automation system gain access to relevant electronic document data, including the vendor invoice, purchase order, contract, and receiving report with a data repository connected to the supplier portal.
AI-driven optical character recognition (OCR) accurately digitizes and captures vendor invoice data, including line items. The centralized electronic document data is available for use in automated invoice verification, invoice matching, and getting vendor invoice approval for payment.
Benefits:
Besides significantly improving invoice processing efficiency, using an AI-driven AP automation system helps your company improve its vendor relationships through better communications, including payment status, and faster payments. A modern, cloud-based AP automation system eliminates paper documents, strengthens internal controls, and helps your business visualize and control spend and make better decisions, using one unified system accessible to stakeholders.
3 – Implement Strong Internal Controls and Exception Flagging
Accounts payable internal controls best practices include proper segregation of duties and limiting role access to the Vendor Master File. For example, in the separation of duties, the accounts payable staff responsible for invoice processing can’t approve invoices for payment, complete payments without proper approval, make journal entries, or post transactions to the general ledger to close the books.
For accounts payable internal controls best practices, strong internal controls should use technology-based systems to detect and flag possible errors, including duplicate invoices, and prevent potential fraud. Not paying invoices twice avoids costs that would lower cash flow at a point in time or forever if vendors don’t promptly issue overpayment credits or pay refunds in cash.
Benefits:
Companies must maintain strong internal controls to prevent fraud and errors. An AP automation solution provides an audit trail and digitizes transactions. Good internal controls also reduce external audit costs because less time is required to complete the audit.
4 – Onboard Vendors and Automate Status Notifications Through a Vendor Portal
AP automation software includes a vendor portal for onboarding your company’s suppliers and enhancing communications, including vendor invoice payment status.
Benefits:
Vendor onboarding through a portal in AP automation software ensures the accuracy of data in the vendor master file without duplication, can be used to collect supplier tax forms like W-9 or W-8 forms, and indicates payment status, payment history, and invoice history. Invoices can be uploaded by suppliers through the vendor portal or received by email or other available methods.
5 – Automate Digital 2 or 3-way Matching of Invoices
Automating electronic invoice matching is another element of accounts payable invoice processing best practices. The AP automation system should perform 3-way invoice matching by line item for goods with purchase orders and receiving reports or 2-way matching of invoices with purchase orders when receiving reports aren’t applicable to the type of accounts payable invoice transaction. Your business should only be paying for the actual quantity of goods ordered and received at the negotiated purchase order price.
Benefits:
Automatic electronic invoice data matching by line item with the purchase order (PO) and receiving report for three-way matching (or two-way invoice and PO matching) ensures that invoices are received for items approved by the company, and payments are only made when required for authorized goods or services received.
6 – Use Automatic AP Invoice Approval Processes
Automated approval is one of the top best practices in accounts payable processes. AP automation software automates the accounts payable invoice approval process by routing invoices to the designated approver in compliance with company policy rules and limits. The accounts payable approval process may use RPA to automate approval routing or give you the ability to add designated approvers. If you add approvers, consider accounts payable internal controls best practices, including segregation of duties, their approval level, and authority to approve an invoice for payment.
Benefits:
Automated invoice approval results in efficiency, no lost or missing paper documents, and faster approvals by designated approvers who can approve from anywhere. AP automation systems flag exceptions and duplicate invoices to avoid payment errors.
7 – Optimize Electronic Payment Methods
Best practices in accounts payable include making electronic payments rather than using paper checks to pay vendors. Fraudsters have expanded the frequency of stealing paper checks in the mail and washing checks to fraudulently revise payees and amounts and steal money from the payers. Besides the risk of financial loss, printing paper checks, signing checks in person or with company stamps, stuffing envelopes with checks, and mailing checks require unnecessary staff time and cost your company money.
Electronic funds transfer (EFT) types include domestic U.S. ACH payments, similar systems outside the United States for bank account-to-bank account transfers, wire transfers, PayPal, and digital wallet transfers. Your business should replace writing paper checks with a cost-effective electronic payment method. With global payments, foreign currency exchange is also a consideration to handle effectively when paying vendor invoices in accounts payable.
Benefits:
Making electronic payments reduces payment costs per invoice, increases efficiency, reduces fraud risk, provides environmental sustainability, and increases the types of payment methods that can be used.
8 – Maximize Early Payment Discounts
Maximizing early payment discounts offered by vendors as invoice terms (like 2/10 net 30) is one of the most essential best practices for accounts payable because it’s a cost-reduction strategy that improves profitability and cash flow. When your business pays its invoices by the 10th day instead of the 30th day when due at the full amount, it can reduce the invoice amount payable by the 2% discount. The discount is not 2% per year, it’s 2% earned in 10 days, so it’s worthwhile taking.
Your AP automation system speeds up invoice processing and vendor invoice approval, making it possible to take these early payment discounts in time with accounts payable invoice processing best practices. When you take early payment discounts consistently, your finance team is a contributor to business results rather than being characterized as a business cost.
Benefits:
Earning and taking early payment discounts saves substantial money (particularly on large inventory purchases) and improves cash flow, gross margin, and profitability.
9 – Promptly Reconcile Payments and Accounts Payable Balances
Reconcile payments and accounts payable balances to the general ledger quickly and regularly to discover accounts payable errors and irregularities and establish cash balance reliability. Reconciliation is best performed as an automated process instead of using manually prepared spreadsheets.
Benefits:
AP automation systems automatically reconcile payments and accounts payable balances. As a result, cash and payables balances will be more accurate and the books can be closed sooner.
10 – Optimize Visibility, Metrics, Business Intelligence, and Real-Time AP Reporting
Best practices for accounts payable include gaining real-time visibility into accounts payable balances, planned payments, and business spend.
Businesses achieve these best practices in accounts payable process goals using AP automation with real-time data analytics, metrics including AP KPIs, AI-enhanced business intelligence, and better accounts payable reporting. With timely accounts payable reports, the accounting and finance departments can review these reports for payment timeliness, resolve vendor discrepancy issues or disputes, and request refunds if desired for credit balances due to your company from infrequent vendors.
Benefits:
All stakeholders have visibility into one real-time system instead of using siloed systems. AP automation software provides real-time dashboards, analytics, and AI-driven business intelligence for decision-making. With an accounts payable automation system, you’ll also capture invoices sooner to make accounts payable balances and business spend more up-to-date for near real-time analysis.
Conclusion
Digital transformation with AP automation software is a key to achieving the benefits of accounts payable best practices. To implement top best practices in accounts payable, discover an AP automation software called Flow by Nanonets.
