The AP Efficiency Dossier

What is Accounts Payable

Accounts Payable refers to the short-term financial obligations or debts that a company owes to its suppliers and creditors. They represent amounts owed for goods and services purchased on credit. Unlike accounts receivable, which refer to money owed to a company, accounts payable refer to money owed by a company.

When a company orders supplies, inventory, or other goods and services from a vendor, the vendor will usually issue an invoice for the purchase amount. The vendor expects this amount to be paid at a later date, which is known as the 'payment period'. The company records this amount in its accounts payable, and must pay the vendor before the end of the payment period. Failure to pay on time can result in late fees, damaged credit, and legal issues.

Accounts payable obligations are shown on a company's balance sheet and are recorded as current liabilities. The amounts owed are usually due within one year. Accounts payable help provide an accurate picture of a company's financial obligations and health. High accounts payable may indicate a company has overextended itself by taking on more debt than it can pay off quickly.

The accounts payable process includes receiving and managing invoices, verifying them against contracts and orders, sending remittance and executing payments. Companies use manual or automated methods to handle accounts payable. Efficient management and processing of accounts payable is an important part of maintaining a healthy cash flow and positive relationships with vendors.

How to make AP efficient

Here are some steps  to make Accounts Payable process efficient:

• Automate the AP process: Automating accounts payable can help eliminate paperwork and manual data entry. Using accounting software or AP automation solutions can help streamline workflow and reduce human error. It also makes it easier to capture early payment discounts and avoid late fees.
• Centralize data: Have a single system of record for all AP data. This could include vendor records, contacts, and remittance details. A centralized database means data is entered once and shared across the organization. It improves data accuracy and accessibility.
• Set clear policies: Establish consistent policies around issues like payment terms, approval limits, and documentation requirements. Provide clear guidelines to vendors and staff. 
• Simplify invoice receipt: Make it easy for vendors to submit invoices in a consistent format either on paper, by email or electronically through a web portal. Consider automated tools for capturing and routing invoice data. Simplified invoice submission reduces hassles for vendors and streamlines internal processing. 
• Automate approval workflow: Define an automated routing and approval process for invoices based on parameters like department, vendor, and dollar amount. Electronic approval workflow reduces paper-based processes and shortens approval cycle times.
• Reconcile on a regular basis: Perform vendor reconciliations regularly to ensure all invoices are accounted for and paid on time. Raise queries with vendors in a timely manner. Regular reconciliations give a more accurate picture of obligations and help avoid late payments or duplicate payments.
• Leverage discounts: Take advantage of early payment discounts offered by vendors whenever possible. Early payment discounts create an incentive for efficient invoice processing and provide a cost saving opportunity.
• Continuous improvement: Continuously monitor key metrics related to your AP function such as on-time payments, discount capture rate, and inquiry response times. Look for ways to simplify systems and processes. Continuous improvement helps achieve maximum efficiency over time.
• Provide staff training: Train all staff involved in the accounts payable process on policies, technology tools, and their responsibilities. Well-trained staff makes fewer errors and requires less supervision, improving productivity.

Why does AP Efficiency matter

• Better cash flow management: Faster and more accurate AP processing means invoices are paid on time, helping avoid late fees and penalties. It also makes it easier to capture early payment discounts offered by vendors. This improves cash flow forecasting and management.
• Reduced costs: Streamlining the AP process decreases the time and resources required to manage accounts payable. Automating manual and paper-based tasks reduces staff workload and simplifies vendor management. Efficiencies also minimize instances of overpayment or duplicate payments. All of this lowers costs associated with accounts payable.  
• Improved vendor relationships: Paying vendors promptly and accurately builds goodwill and trust. Vendors are more willing to negotiate better pricing and terms when they know invoices will be paid on time. They are also more likely to prioritize orders and deliveries for customers that pay efficiently.
• Better visibility and control: An optimized AP process provides real-time visibility into liabilities and payment timeframes. Management has a clear view into discounts taken versus missed, vendor payment trends, and processing bottlenecks. This high level of visibility and oversight gives companies more control over cash outflows and risk management. 
• Data accuracy: Manual and inefficient AP processes are prone to errors and inconsistencies. Automating tasks like data capture, workflow, and payment issuance minimizes keystroke errors and discrepancies within vendor and payment records. Accurate data enables reliable reporting and forecasting. 
• Compliance: Strict policies and procedures around AP help ensure compliance with legal, tax and accounting requirements. All invoices are paid accurately and on time, with appropriate approvals and documentation. Non-compliance can result in penalties and damage to reputation.
• Scalability: An efficient accounts payable function with streamlined processes can scale readily as invoice volume grows. Companies can take on more suppliers and increase purchasing without a proportional increase in resources required. Scalability allows for business expansion at a lower cost.

Key metrics to track

Some important key metrics to track for Accounts Payable include:

• On-time payment percentage: This measures the percentage of invoices paid within the approved payment terms. A high percentage indicates invoices are processed efficiently without unnecessary delays. A low rate means late payments could incur penalties or damage vendor relationships.
• Discount capture rate: This tracks the percentage of early payment discounts actually taken from vendors. It shows how effective your AP team is in accelerating payments to capture discounts. A high discount rate saves money through available savings opportunities. 
• Cost to process an invoice: This calculates the total AP cost involved in processing a single invoice from receipt to payment. A increasing cost trend means resources are being used ineffectively and processes need improvement. A decreasing cost demonstrates greater efficiency and productivity gains.
• Vendor aging report: This report shows how much is owed to vendors and for how long. Aging categories are usually 0-30 days, 31-60 days and 60+ days. Large amounts in the older aging brackets signal slower payments and need for collection. Smaller amounts in all brackets indicate healthy vendor relationships and on-time payments.
• Invoice cycle time: This tracks the average time between receiving an invoice and issuing payment. A short cycle time demonstrates fast and efficient processing. It allows companies to capture more discounts and avoid penalties. Longer cycle times imply slow or manual processes that need more automation or streamlining.  
• Percentage of electronic payments: This measures the proportion of vendor payments made electronically versus paper checks. A higher percentage of electronic payments is more efficient, cost-effective and eco-friendly. It also provides faster settlement times for vendors. Most companies aim for 60-80% or higher.
• Staff productivity: This monitors the volume of invoices and payments processed by each AP staff member in a period of time. Improving productivity over time reflects greater effectiveness and experience. Declining productivity signals need for performance management, additional training, or process improvements.  
• Audit scores: For companies with external audits of accounts payable, audit scores provide feedback on performance and compliance. Higher scores over time demonstrate continuous improvement and adherence to best practices. Lower scores require remedial action to avoid unfavorable audit results.