Accounts Payable Guide | Process, 3-Way Matching & Automation

Accounts Payable Guide Process, 3-Way Matching & Automation

In any business, keeping track of financial transactions is essential to maintaining smooth operations. Accounts payable is one such aspect of financial management that is critical to the success of any organisation. In this article, we will discuss what accounts payable is, its importance, and how it can be managed efficiently.

What is Accounts Payable?

Accounts payable (AP) is a financial term used to describe the money owed by a company to its suppliers or vendors for goods or services received. In simpler terms, it refers to the outstanding bills that a company has yet to pay. Accounts payable is a liability for the company and appears on the balance sheet as such.

When a company orders goods or services from a vendor, the vendor usually sends an invoice detailing the purchase. The company then reviews the invoice, verifies the accuracy of the charges and the goods or services received, and then makes a payment to the vendor. This process is known as the accounts payable process.

Why are Accounts Payable Important?

The accounts payable process is crucial to maintaining a healthy cash flow in a business. It ensures that the company maintains good relationships with its suppliers by paying bills on time and avoiding any late payment fees or interest charges.

Furthermore, managing accounts payable efficiently helps the company forecast its expenses accurately, allowing it to allocate its resources more effectively. It also helps the company to monitor its cash flow and financial health by keeping track of its outstanding debts and ensuring that they are paid promptly.

Managing Accounts Payable Efficiently

Effective management of accounts payable requires an organised and streamlined process. Here are some key steps to ensure that accounts payable are managed efficiently:

  1. Accurate Record-Keeping: Maintaining accurate records of all transactions related to accounts payable is critical. This includes keeping track of invoices, payments, and any other related documents.
  2. Regular Reconciliation: It is essential to reconcile accounts payable regularly. This means comparing the outstanding bills with the records in the accounting system to ensure that all payments have been accurately recorded.
  3. Timely Payments: Paying bills on time is crucial to maintaining good relationships with suppliers and avoiding any late payment fees or interest charges. Establishing a schedule for payments and sticking to it can help ensure timely payments.
  4. Proper Approval Process: Establishing a clear approval process for accounts payable can help prevent unauthorised or erroneous payments. This process should include verification of invoices and approval by the appropriate personnel.
  5. Use of Technology: Technology can help automate many aspects of the accounts payable process, such as invoice processing, approval, and payment. This can help streamline the process and reduce errors.

Accounts Payable and Cash Flow Management

Effective management of accounts payable is essential to maintaining a healthy cash flow. Here are some ways that accounts payable can impact cash flow management:

  1. Payment Terms: Payment terms negotiated with suppliers can significantly impact cash flow. Negotiating favourable payment terms can help manage cash flow more effectively.
  2. Payment Prioritisation: Prioritising payments based on their due dates and the importance of the supplier can help manage cash flow more effectively.
  3. Cash Flow Forecasting: Forecasting cash flow can help identify potential shortfalls in funds, allowing the company to take steps to manage its accounts payable more effectively.

What are the 4 functions of Accounts Payable?

Function 1: Invoice Processing 

The first function of accounts payable is invoice processing. This involves receiving invoices from vendors and suppliers and ensuring that they are accurate and valid. The accounts payable team will review the invoices for any discrepancies, such as incorrect pricing, missing or incorrect purchase order numbers, or other errors. They will then code the invoices and enter them into the company’s accounting system.

This function is critical to ensure that the company is only paying for goods and services that were received and that the pricing is accurate. Incorrect invoices can result in overpayment, which can harm the company’s financial performance. By ensuring that invoices are accurate and valid, the accounts payable team can help the company save money and maintain strong relationships with vendors and suppliers.

Function 2: Payment Processing

The second function of accounts payable is payment processing. Once invoices have been reviewed and approved, the accounts payable team is responsible for issuing payments to the vendors and suppliers. This process can involve cutting checks, initiating electronic payments, or processing credit card transactions.

Payment processing is a critical function of accounts payable because it ensures that vendors and suppliers are paid on time. Timely payments are essential for maintaining good relationships with these parties and ensuring that the company continues to receive the goods and services it needs to operate. Late payments can damage these relationships and result in late fees or penalties, which can be costly for the company.

Function 3: Vendor Management 

The third function of accounts payable is vendor management. This involves maintaining a database of vendor information, including contact information, payment terms, and performance metrics. The accounts payable team is responsible for managing this database and ensuring that it is up-to-date and accurate.

Vendor management is important because it helps the company maintain strong relationships with its vendors and suppliers. By tracking vendor performance metrics, such as on-time delivery and product quality, the accounts payable team can identify areas for improvement and work with vendors to address any issues. This can help the company save money and improve its overall performance.

Function 4: Accrual Accounting 

The fourth function of accounts payable is accrual accounting. This involves recording expenses that have been incurred but not yet paid. For example, if a vendor invoice is received at the end of the month but is not due until the following month, the expense must be recorded in the current month’s financial statements as an accrual.

Accrual accounting is important because it ensures that the company’s financial statements accurately reflect its financial position. By recording expenses that have been incurred but not yet paid, the company can provide a more accurate picture of its financial performance. This information is important for investors, lenders, and other stakeholders who rely on the company’s financial statements to make decisions.

What is the Accounts Payable Process?

The accounts payable process includes various steps, starting from the creation of a purchase order to the payment of the invoice. In this article, we will take a closer look at the accounts payable process and its various stages.

Stage 1: Purchase Order Creation

The accounts payable process starts with creating a purchase order (PO) by the company’s purchasing department. The PO is a document that specifies the details of the purchase, including the product or service being ordered, the quantity, the agreed-upon price, and the delivery date. Once the PO is created, it is sent to the vendor for approval.

Stage 2: Receiving of Goods or Services

Once the vendor approves the PO, they will deliver the goods or services to the company as specified in the PO. The receiving department of the company will inspect the goods or services to ensure that they are of the agreed-upon quality and quantity. If there are any discrepancies, the receiving department will note them in a receiving report.

Stage 3: Invoice Processing

After the receiving department confirms the receipt of goods or services, the vendor sends an invoice to the accounts payable department. The invoice contains details of the transaction, including the product or service delivered, the quantity, the agreed-upon price, and any other applicable charges. The accounts payable department will match the invoice with the PO and the receiving report to ensure that all the details match. If everything matches, the invoice will be approved for payment.

Stage 4: Payment Processing

Once the invoice is approved, the accounts payable department will process the payment. Depending on the terms of the agreement between the company and the vendor, the payment can be made immediately or within a specified time frame. The payment can be made through various methods, including cheques, wire transfers, or electronic payments.

The accounts payable process involves various steps, and it is essential to ensure that each stage is carried out accurately and efficiently to avoid errors and discrepancies. Implementing an automated accounts payable system can help streamline the process and make it more efficient.

Benefits of an Automated Accounts Payable Process

Implementing an automated accounts payable process can provide numerous benefits for a company, including:

  1. Improved Efficiency: Automating the accounts payable process can help reduce the time and effort required to process invoices and payments. It can also help eliminate errors and discrepancies, leading to improved efficiency and productivity.
  2. Cost Savings: An automated accounts payable process can help reduce the costs associated with manual processing, such as paper, printing, and storage costs. It can also help reduce the risk of late payments and penalties.
  3. Better Visibility: An automated accounts payable system can provide real-time visibility into the status of invoices and payments, enabling companies to make informed financial decisions.
  4. Improved Supplier Relationships: Automating the accounts payable process can help improve supplier relationships by enabling companies to process payments more efficiently and accurately, leading to improved trust and satisfaction.

What is 3-way Matching in Accounts Payable?”

In accounts payable, the process of three-way matching is a critical step in ensuring the accuracy of financial transactions. It involves comparing three essential documents related to a purchase transaction: the purchase order, the invoice, and the receiving report. By doing so, companies can reduce the risk of errors and fraud, and ensure that they pay only for the goods or services received. In this article, we will explore what three-way matching is, why it is important, and how it works in the accounts payable process.

What is Three-Way Matching?

Three-way matching is a procedure used to validate and approve a vendor invoice before payment is made. It involves matching the details of the invoice with the details of the purchase order and the receiving report. The purchase order is a document issued by the company to the vendor that outlines the goods or services to be provided, their quantities, and prices. The receiving report is a document generated when the goods or services are received, indicating the quantities and quality of the items received.

The three documents – the purchase order, the invoice, and the receiving report – must match in terms of item, quantity, and price. If all three documents match, then the invoice can be approved for payment. If there are discrepancies between the documents, then the invoice must be reviewed and reconciled before payment can be made.

Why is Three-Way Matching Important?

Three-way matching is important because it helps to ensure the accuracy of financial transactions and reduces the risk of errors and fraud. By verifying that the goods or services have been received and that the invoice matches the purchase order and the receiving report, companies can prevent overpayment, duplicate payments, and paying for goods or services that were not received.

In addition, three-way matching helps to maintain good relationships with vendors. By ensuring that vendors are paid accurately and promptly, companies can build trust and credibility with their suppliers, which can lead to more favourable terms and conditions in future transactions.

How Does Three-Way Matching Work in the Accounts Payable Process?

The three-way matching process typically starts with the purchase order. When a company needs to purchase goods or services, a purchase order is created and sent to the vendor. The purchase order outlines the details of the transaction, such as the items to be purchased, the quantity, the price, and the delivery date.

When the vendor delivers the goods or services, a receiving report is generated. The receiving report details the items received, the quantity, and the quality. This report is then matched with the purchase order to ensure that the correct items were received in the correct quantity.

Once the receiving report has been matched with the purchase order, the invoice is received from the vendor. The invoice is then matched with the purchase order and the receiving report to ensure that all three documents match in terms of item, quantity, and price. If there are discrepancies between the documents, the invoice must be reviewed and reconciled before payment can be made.

If all three documents match, the invoice can be approved for payment, and the payment is processed. Once the payment has been made, the transaction is considered complete.

Benefits of Three-Way Matching

Three-way matching offers several benefits for companies. First, it helps to prevent errors and fraud by ensuring that invoices are accurate and reflect the goods or services received. Second, it helps to maintain good relationships with vendors by ensuring that they are paid promptly and accurately. Third, it helps to improve financial controls by providing an additional layer of verification for purchase transactions.

Another benefit of three-way matching is that it can help companies to identify and resolve issues with their vendors. For example, if a vendor consistently provides goods or services that do not match the purchase order, then the company can use the three-way matching process to identify these issues and work with the vendor to resolve them.

What are Accounts Payable Outsourcing?

Accounts payable is a crucial function for any business, as it involves the payment of invoices to vendors and suppliers. This process can be time-consuming and complex, especially for businesses with a high volume of invoices to process. Accounts payable outsourcing is a solution that can alleviate these issues by delegating the responsibility of invoice processing and payment to a third-party service provider.

Outsourcing accounts payable involves partnering with a service provider who will manage the entire process, from invoice receipt to payment. This allows businesses to focus on their core competencies and reduce the time and resources they spend on managing accounts payable.

Why Outsource Accounts Payable?

There are several reasons why businesses choose to outsource their accounts payable processes:

  1. Cost Savings: One of the primary reasons businesses outsource accounts payable is to save on costs. By outsourcing this function, businesses can reduce the number of staff members needed to manage the process, as well as the associated overhead costs.
  2. Increased Accuracy: Accounts payable outsourcing providers are experts in their field and have extensive experience in managing invoices and payments. They use advanced technology and software to ensure the accuracy of data entry, invoice matching, and payment processing, reducing the risk of errors.
  3. More Efficient Processes: Outsourcing accounts payable can streamline the entire process, from invoice receipt to payment. Service providers use automated systems to capture data and streamline workflows, reducing processing times and improving efficiency.
  4. Scalability: As businesses grow, their accounts payable needs can become more complex. Outsourcing accounts payable allows businesses to scale their processes easily and efficiently, without the need to hire additional staff or invest in new technology.

Challenges of Accounts Payable Outsourcing

While there are many benefits to outsourcing accounts payable, there are also some challenges to consider. These include:

  1. Security Concerns: Outsourcing accounts payable involves sharing sensitive financial information with a third-party service provider. This can raise security concerns, as businesses need to ensure that their data is protected and secure.
  2. Communication Issues: Effective communication is critical when outsourcing accounts payable. Service providers must understand a business’s unique requirements and workflows to provide the best service possible. If there are communication issues, it can lead to errors and delays in processing.
  3. Integration with Existing Systems: Integrating outsourced accounts payable processes with existing systems can be a challenge. Businesses need to ensure that the service provider’s technology is compatible with their existing software, and that data can be seamlessly transferred between the two.
  4. Quality Control: Outsourcing accounts payable can make it more difficult to monitor quality control. Businesses need to establish clear guidelines and procedures to ensure that the service provider is delivering high-quality services consistently.

Choosing an Accounts Payable Outsourcing Provider

Choosing the right accounts payable outsourcing provider is critical to the success of the process. Here are some factors to consider when selecting a provider:

  1. Experience: Look for a provider with extensive experience in accounts payable outsourcing. This ensures that they have the knowledge and expertise to handle your business’s unique needs.
  2. Technology: Choose a provider that uses advanced technology and software to manage the accounts payable process. This ensures accuracy, efficiency, and scalability.
  3. Flexibility: Look for a provider that can adapt to your business’s changing needs and processes. They should be able to customise their services to meet your specific requirements.
  4. Security: Choose a provider that prioritises security and has robust measures in place to ensure your data is protected and secure.

What is Accounts Payable Automation?

Accounts payable automation refers to the use of technology to streamline and automate the process of managing vendor invoices and payments. This process involves automating tasks such as invoice capture, data entry, invoice approval, and payment processing, among others.

Accounts payable automation has become increasingly popular in recent years, as businesses have recognised the benefits of automating repetitive tasks and reducing manual errors. In this article, we will explore the key features and benefits of accounts payable automation, as well as some common challenges and best practices for implementation.

Key Features of Accounts Payable Automation

  1. Invoice Capture and Data Extraction: One of the most important features of accounts payable automation is the ability to capture vendor invoices electronically and extract the relevant data. This can be done using optical character recognition (OCR) technology, which allows the system to read and interpret the information on the invoice automatically.
  2. Invoice Approval Workflow: Once the invoice has been captured and the data has been extracted, the system can automatically route the invoice through the appropriate approval workflow. This can be based on predetermined rules, such as invoice amount or department, and can be configured to require approval from multiple parties before the invoice can be paid.
  3. Payment Processing: Once the invoice has been approved, the accounts payable automation system can initiate payment processing automatically. This can include sending payment files to banks or other payment processors, issuing checks, or initiating electronic payments such as ACH transfers.
  4. Reporting and Analytics: Accounts payable automation systems typically include robust reporting and analytics capabilities, which allow businesses to track key metrics such as invoice cycle time, approval times, and payment processing times. This can provide valuable insights into the efficiency and effectiveness of the accounts payable process and help identify areas for improvement.

Benefits of Accounts Payable Automation

  1. Increased Efficiency: By automating the accounts payable process, businesses can reduce the amount of time and resources required to manage vendor invoices and payments. This can free up employees to focus on more strategic tasks and improve overall productivity.
  2. Reduced Errors and Fraud: Accounts payable automation can help reduce the risk of manual errors and fraud by automating key tasks such as data entry and invoice approval. This can improve the accuracy of financial records and reduce the risk of financial losses due to fraud.
  3. Improved Cash Flow Management: Accounts payable automation can help businesses improve their cash flow management by streamlining invoice approval and payment processing processes. This can reduce the amount of time it takes to process invoices and issue payments, ensuring that vendors are paid on time and avoiding late payment fees or penalties.
  4. Better Vendor Relationships: By improving the efficiency and accuracy of the accounts payable process, businesses can build stronger relationships with their vendors. This can lead to improved pricing, better service, and more favourable payment terms.

Challenges of Accounts Payable Automation

  1. Implementation Costs: Implementing an accounts payable automation system can be expensive, especially for small businesses. This may require significant investment in software, hardware, and personnel to get the system up and running.
  2. Integration with Existing Systems: Accounts payable automation systems may need to integrate with existing enterprise resource planning (ERP) or accounting systems, which can be complex and time-consuming.
  3. Resistance to Change: Employees may be resistant to change, especially if they are used to traditional manual processes. It may be necessary to provide training and support to help employees adapt to the new system.
  4. Data Quality Issues: Accounts payable automation relies on accurate data, which may not always be available. Data quality issues can lead to errors and delays in the process, which can be costly and frustrating for businesses and vendors alike.

What is the difference between AP Automation and Outsourcing?

While both AP automation and outsourcing can deliver significant benefits, they differ in important ways. Here are some of the key differences:

  1. Ownership and Control

One of the most significant differences between AP automation and outsourcing is ownership and control. With AP automation, the business retains ownership and control of the AP process. The business implements automation technology and is responsible for ensuring its effectiveness and accuracy.

With outsourcing, the third-party provider takes ownership of the AP process. While the business may still have some oversight and control, the provider is responsible for executing the AP process and ensuring its accuracy.

  1. Level of Automation

Another difference between AP automation and outsourcing is the level of automation. AP automation can provide a high level of automation, with many tasks being fully automated, including invoice capture, coding, routing, approval, and payment. This can significantly reduce manual labour, increase efficiency, and improve accuracy.

Outsourcing, on the other hand, typically involves a lower level of automation. While the provider may use some automation technology, many tasks are still completed manually. This can result in longer processing times, lower accuracy, and less visibility into the AP process.

  1. Costs

Another important difference between AP automation and outsourcing is costs. While both solutions can deliver cost savings, they do so in different ways.

AP automation can be expensive to implement initially, as it requires an investment in technology and software. However, over time, AP automation can deliver significant cost savings by reducing manual labour and errors, increasing efficiency, and improving accuracy.

Outsourcing can also deliver cost savings, but it typically involves ongoing costs in the form of service fees. While outsourcing can reduce labour costs, it may also involve additional costs such as setup fees, training fees, and transaction fees.

  1. Flexibility

AP automation provides businesses with a high level of flexibility in terms of customising the AP process to meet their specific needs. Businesses can configure automation technology to match their unique workflows, approval processes, and payment methods.

Outsourcing, on the other hand, may offer less flexibility. Businesses must work within the framework of the service provider’s processes and workflows, which may not be customisable to the same extent as AP automation.

Conclusion

Accounts payable outsourcing can be an excellent option for companies that want to streamline their financial operations and reduce their costs. By outsourcing accounts payable tasks, businesses can free up their employees to focus on more strategic tasks, reduce the risk of errors and fraud, and improve their overall financial management.

However, before choosing an accounts payable outsourcing provider, it’s important to carefully evaluate your options and consider factors such as the provider’s reputation, experience, technology, and pricing. By doing your due diligence, you can ensure that you select a provider that will meet your company’s specific needs and deliver the results you’re looking for.

Overall, accounts payable outsourcing can be a valuable tool for businesses that want to improve their financial operations and gain a competitive advantage in their industry. Whether you’re a small startup or a large corporation, outsourcing can help you achieve your financial goals and drive growth in your business.

To learn how Quantante can improve your company’s Back Office operations contact us here.

Photo by Towfiqu barbhuiya on Unsplash

Related Resources

Advancing Customer Interaction with Interactive Voice Response Phone Systems

Knowledge Hub

Customer Self-Serve: Empowering Customers and Businesses through Efficient Support

Knowledge Hub

Discover New Solutions for Your Business at the 2023 IAAO Conference

Blogs