Accounts Payable: The Best Practices for a Competitive Advantage
There are many reasons why an organization’s revenue can slip through the cracks. Outdated technology, lack of training, employee turnover and complacency are common culprits. Accounts Payable tends to be the land of the lost-disregarded and undervalued. Ignoring best practices in this department leads to loss of revenue and poses significant financial risk to your operation. Accounts Payable is critical to optimizing capital; it’s time to shed light on this core strategy.
Taking a strategic approach to Accounts Payable requires a business owner first to identify which practices are holding up their business. Common mistakes include:
- Onboarding suppliers without following a standardized procedure
- Duplicating payments due to workarounds in the ERP system
- Missing the risky behaviors that expose your business to disbursement fraud
- Taking liberties with late vendor payments
- Not separating the duties of new supplier approval from invoice payment
A well-functioning Accounts Payable department is an opportunity to optimize payables and free up the working capital needed to fuel growth. Strengthening your accounts payable department processes and procedures is a big task. Addressing the following areas first will help build momentum:
- Automated invoice and payment processes. Too often, small businesses use error-prone manual processes to approve requisitions, scan supplier invoices, and issue payments. Adopting automated systems will reduce the number and mistakes and increase the effectiveness of process controls.
- AP Workflow. Unless you have an AP workflow in place, your ERP system will only act as a gatekeeper. Without an intentional workflow, manual loopholes make it possible to outsmart the very systems you have in place to prevent these mistakes. Setting up a workflow – a series of checks and balances – will help you avoid these errors before they begin. For example,
- Duplicate Payments. One challenging area for some of our clients are payments to vendors via check and by credit card. To avoid duplicate payments, we often suggest requiring PO numbers for payments made by credit card.
- Three-Way Matching. It is always a good idea to confirm that the supplier invoice amount aligns with the goods or services you have purchased. Failure to do this can leave your organization susceptible to paying for things you did order, receive or approve. To prevent this, consider adopting a three-way matching approach to your checks and balances. This steps triple checks your process for oversights or mistakes. The three documents you will review are the vendor invoice, purchase order and receiving document (packing slip or report).
- Airtight Master Files. Take vendor management seriously before an internal audit. Establishing and maintaining a clean vendor master file will safeguard you against potential fraud. Keeping records and contracts up-to-date will help you identify red flags and make it easier for your procurement personnel to do their jobs.
- Proactive Behaviors. Your organization will benefit from a proactive approach, but three main areas will outshine in the Accounts Payable department.
- Dynamic discounting produces a risk-free, annualized return on investments, simply by leveraging payments terms to your advantage. In simplified terms, the purchasing organization offers to pay their suppliers early in exchange for a discount. This synergistic approach is dependent on transparent and up-to-date disbursement systems and works best in organizations that have an efficient AP workflow.
- On average, fraud takes 18 months to uncover. In addition to internal and external audits, businesses need to commit to regular, rigorous fraud monitoring. Being proactive in this area means establishing controls that look for red flags such as employee-vendor matches, invoice anomalies, or prohibited entities in your master list. Aggressive monitoring should not invoke a culture of distrust; it should instill a core value around trustworthiness.
- A great byproduct to careful monitoring is an instinct toward recovery audits. When a department initiates recovery audits as part of their quarterly review process, they catch incidents like overpayments and pricing compliance before they require emergency mitigation.
- A Thriving Team. If members of your accounting team have made a habit of extending payment cycles or accepting discounts without calculating the costs or neglect to take advantage of maximum savings through volume rebates, it might be time to reassess your staffing structure. Reactive accounting will not support your growth; it will curb your progress. Be sure your AP team knows their value, is adequately staffed, sufficiently trained, and has the right skillsets for tasks at hand. Personnel in this department need to have an analytical mind and the tools to get the job done.
Poor accounts Payable procedures happen in both developing and mature enterprises. If you need help strengthening your Accounts Payable department processes and procedures or if you want to talk about creating a capital optimization strategy, our office professionals can help! Give us a call to start today.