The full accounts payable process

When a business purchases items or services from a supplier, accounts payable will be the ones to track it. The steps they go through are generally referred to as the accounts payable process (sometimes known as the accounts payable workflow or cycle). Throughout this process, the AP department will make frequent use of three key documents to ensure accuracy: receiving reports, purchase orders, and vendor invoices.

Accounts payable is an integral part of the wider procurement process, each part of which must work closely together to ensure efficiency and control. An optimized AP process will lead to fewer surprise invoices, better performance across accounts payable KPIs, and a potential decrease in late payments or penalties. The entire company therefore benefits when accounts payable and procurement are strongly linked and run efficiently.

What is the accounts payable process?

The accounts payable process is the series of steps that make up the workflow involved in accounting for purchases. It’s immensely important as it applies to almost every payment a company makes outside of payroll. And as modern businesses tend to pay a lot of creditors on a frequent basis, making prompt and accurate invoice payment is essential for maintaining supplier relationships.

Due to the frequency and size of the payments that are generally made by AP teams, the accounts payable process is often the target of fraud or theft. Internal controls and processes are therefore required to spot inaccuracies and prevent fraudulent invoices.

The exact nature of the end-to-end accounts payable process will differ depending on the size and type of the businesses involved. Generally though, the process can be broken down into the following steps:

• Completing a purchase order
• Processing a receiving report
• Receiving, processing, and paying the invoice

Here’s a little bit more detail about each step in the accounts payable process:

Completing a purchase order

The first step is for a purchase order to be put together and sent to the relevant supplier. A purchase order (or PO) is a document that communicates a business’s intention to buy goods from a supplier. It can be considered a reverse invoice, as it sets out the items or services a business intends to purchase, as well as prices and quantities. A purchase order will also list any terms and conditions, alongside the delivery timeline.

The purchase order process begins with a team member having a resourcing need. They (or another member of the team) will then identify the ideal supplier, before a member of accounting, such as a budget manager, approves the purchase. The PO will be created and sent to the supplier after which the good or services will be delivered.

Processing a receiving report

Once the goods or services have been received, a receiving report will be developed. This is a company’s documentation of the goods and/or services and should be compared to the description on the purchase order. It is imperative these match. Once reconciled, they need to be compared to the vendor invoice.

A receiving report can also be used to document returns. If the goods are damaged, for example, the receiving report will include the reason.

Receiving, processing, and paying the invoice

The vendor or supplier will then send an invoice to the purchasing company. Once it has been received, it is often referred to as a vendor invoice. The vendor invoice will include the total amount due (inclusive of discounts) and all of the relevant vendor details.

Each invoice will then be sent to the accounts payable department to be processed in line with the vendor payment terms. A larger business may settle invoices using its treasury department, while a small business may use a payable specialist or an AP office.

Whoever in the accounting department is responsible for handling the invoice, they will likely make use of a reviewal process such as the three-way match. Once revised and confirmed, a payable clerk will issue the final payment, at which point a bookkeeper should verify and record the whole process.

Accounts payable procedures to follow

In addition to the general steps that make up the AP process, there are also many important individual AP procedures that can be followed along the way to help prevent fraud and verify the invoices received. They include:

• Three-way match – a technique to ensure that only accurate and valid vendor invoices are recorded and paid. The details in the purchase order, receiving report, and vendor invoice will only be entered into the AP account and scheduled for payment once all three documents are aligned.
• Vouchers – a voucher will document at which stage the approval process is at. It can include the supporting documents, as well as note approvals, account numbers and so on. Once the invoice has been paid, the voucher and its attachments will be moved to a paid invoice file, or otherwise indelibly marked as being paid.
• Separation of duties – if multiple people are required to sign off on an invoice, it makes fraud or theft a lot harder. For example, one employee may prepare the POs, one may prepare the receiving reports, another may compare the documentation as part of the three-way match and yet another may pay the vendor. This would require multiple parties to have to steal from the company, rather than a single dishonest individual.

Improving the accounts payable process

The AP process as a whole is one of the most important accounting processes as it can often encompass a vast number of payments, upon which a great number of vendors may be dependent. Therefore, it is becoming ever more important for businesses to make use of AP automation software solutions. These solutions offer a range of benefits that minimize reliance on manual processes and improve the efficiency and accuracy of the accounts payable process, including:

• Automated data entry – AP teams often spend too much time manually typing in data, which can lead to errors. Using software to automate this step can help accounting teams keep more accurate records of expenses and cash flow.
• Integration with existing systems – AP automation solutions can often integrate with a business’s ERP, database, or other financial system. A comprehensive approach means less data re-entry and fewer applications are required.
• Timely payment – invoice automation tools such as those offered by Taulia can automatically extract invoice data, route for approval and lead to faster payment. This prevents invoices sitting around waiting for approval.
• Early-payment discounts – vendors frequently offer discounts for early payment, but many businesses miss out due to manual invoice routing impeding the process.
• Reduced use of paper – the AP department frequently tends to be one of the most paper-based parts of a business. Organizing and processing paper invoices is both time-consuming and can be harmful to the environment.

You can read more about the benefits of AP automation here, or get in touch with us to find out how Taulia’s AP automation solution can improve your accounts payable process.