For many CFOs this means extending payables as long as possible to ensure maximal cash flow. However, this short-term strategy can often backfire. Withholding payments can damage supplier relationships. As a result, suppliers may slow delivery times, be less willing to respond to queries or concerns, and insist on more stringent payment terms.
On the other hand, when you pay invoices on time it often yields benefits such as early payment discounts. It also builds stronger supplier relationships – an asset in light of global supply chain insecurity.
To identify and realize these benefits, you must take a strategic approach to managing accounts payable. By taking leadership in building a working capital culture that emphasizes the importance of optimizing accounts payable, you can free up working capital to invest in growing your business.
Read on to explore the benefits of strategic accounts payable management, six management strategies to build a working capital culture, and how accounts payable automation can help you manage AP more effectively.
Accounts payable (AP) management is a critical process for any business that buys goods or services on credit. Proper AP management ensures that a company takes advantage of early payment discounts avoids late fees and maintains positive relationships with suppliers. Read on to learn what accounts payable entails and why AP management matters.
What Are Accounts Payable?
Accounts payable (AP) refers to money owed by a company to its suppliers and vendors for goods or services purchased on credit It appears as a liability on the balance sheet until the bill is paid
For example, if a business buys $1,000 worth of office supplies on credit, its accounts payable balance increases by $1,000. When the company pays the bill, accounts payable is reduced by $1,000. AP represents all outstanding payments due to suppliers and vendors
Key Elements of Accounts Payable Management
Managing accounts payable involves several key tasks:
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Processing Invoices: When an invoice comes in, it must be entered into the AP system and approved. Accurate data entry ensures the business has a reliable open AP balance at any given time.
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Taking Discounts: Suppliers often offer discounts for early payment, such as 2% off if paid within 10 days. Effective AP management ensures invoices get paid on time to capture any available discounts.
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Prioritizing Payments: With limited cash flow, accounts payable staff must decide which bills to pay first. Priorities may include due date, early payment discounts, supplier relationships, and more.
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Managing Cash Flow: Paying bills too early reduces cash available for other needs. Paying late leads to fees and damages supplier relations. AP management aims for ideal timing of disbursements.
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Error Checking: Before paying an invoice, it should be double-checked against purchase orders and receiving documents to catch any discrepancies or errors.
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Reporting: AP teams provide stakeholders with reports detailing outstanding payables, payments made, discounts taken, and metrics like days payable outstanding (DPO).
Why Accounts Payable Management Matters
Effective AP management provides several important benefits:
Maximize Early Payment Discounts
Vendors often incentivize early payment through discounts, such as net-30 terms that offer a 2% discount if the invoice gets paid within 10 days. Discounts are beneficial because:
- They reduce the overall cost of purchasing goods and services.
- The savings generally exceed what the company could earn by investing the cash elsewhere in the short term.
- Taking discounts improves profit margins.
With thousands of invoices, identifying and taking all available discounts requires efficient AP processes.
Optimize Cash Flow
Businesses want to maintain enough cash reserves to operate smoothly and jump on opportunities. Poor AP practices drain cash flow unnecessarily.
Paying bills too early means cash sits unproductively with the supplier. But paying late destroys supplier relations, leads to late fees, and could even cause shipments to stop.
AP teams optimize cash flow by taking discounts when available but otherwise paying as close to the due date as possible.
Strengthen Supplier Relationships
Suppliers appreciate buyers who pay on time as agreed. They will be more willing to extend credit, offer better terms, and prioritize your business.
But if payments are repeatedly late, suppliers could revoke credit or raise prices. Damaged supplier relations disrupt business operations.
AP teams maintain positive supplier relationships through accurate and timely payments. This provides advantages over competitors with poor AP habits.
Reduce Risk of Fraud and Errors
Without proper controls, employees could abuse AP systems to direct payments to personal accounts or approve bogus invoices from fake suppliers.
Even honest mistakes like duplicating payments and overlooking unauthorized charges are expensive. Consistent AP procedures reduce fraud, waste, and abuse.
Provide Visibility into Cash Commitments
The open AP balance represents cash the business has committed to pay in the short term. Without visibility into upcoming outflows, companies risk overestimating available cash.
AP reporting also helps forecast short-term cash requirements and identify payment trends.
Accounts Payable Best Practices
Here are some top practices and metrics for successful AP management:
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Centralize AP activities for efficiency, control, and visibility.
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Set parameters for invoice and payment approvals based on things like employee roles and dollar amounts.
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Take available discounts whenever feasible to reduce costs.
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Benchmark discount capture rate as a key performance metric.
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Pay close to due dates to optimize cash flow.
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Measure days payable outstanding (DPO) to assess payment timeliness.
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Automate mundane tasks like payment disbursement for efficiency.
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Use OCR and workflows to streamline invoice processing.
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Report key AP metrics regularly to leadership and stakeholders.
Implementing Accounts Payable Software
Accounts payable software provides tools to automate, streamline, and optimize the AP process. Features may include:
- Invoice capture and digitization
- Customizable workflows for approvals and exception handling
- Rules-based prioritization of payments
- Disbursement automation
- Discount and rebate tracking
- AP analytics and reporting
Cloud-based AP automation enables remote access and collaboration across business units and geographic regions. This improves visibility and control over AP.
Configurable rules ensure proper controls and compliance while eliminating mundane manual tasks. Electronic workflows speed up transaction processing times.
Ultimately, AP automation saves money, improves supplier relations, and provides dynamic visibility into cash flow commitments to help Treasury and Finance better manage resources.
The Bottom Line
Accounts payable represents a significant outflow of cash for any company that purchases goods or services on credit terms. Businesses must manage AP efficiently to maximize early payment discounts, maintain positive supplier relationships, optimize working capital, reduce fraud risk, and gain visibility into short-term cash flow needs.
Automating the invoice-to-payment process saves time and money while providing stakeholders with real-time analytics. Effective accounts payable management delivers quantifiable returns and competitive advantages.
Goals of strategic accounts payable management
Strategic accounts payable management involves optimizing AP processes to improve your ability to manage cash flow and ensure sufficient working capital.
An effective AP strategy has five goals:
- Ensure timely payments: Pay vendors by their due dates to avoid late fees and maintain positive vendor relationships.
- Accurate financial reporting: Ensure that vendor invoice data is captured and validated and that invoices have been approved for payment before processing.
- Governance and compliance: Ensure all processes and payments comply with legal and regulatory requirements to avoid fines and penalties.
- Cost reduction: Reduce the cost of invoice processing and payment workflows while maintaining efficiency.
- Improved processing efficiency: Streamline the procurement-to-pay workflow to reduce manual tasks, prevent errors, and improve processing times.
By achieving these goals, you gain greater visibility and control over AP processes and data – and the ability to make and execute informed decisions to manage working capital.
You can improve the accuracy of your cash flow forecasts and budgeting to anticipate and mitigate funding gaps and improve liquidity. You can save money by reducing your exposure to both fraud and costly errors, all the while streamlining manual processes. You can also leverage improved payment efficiency to negotiate preferable terms with suppliers like risk sharing, flexible payment terms, and early payment discounts.
Change isn’t always easy, but a strategic approach to your accounts payable management process can yield substantial benefits – and a healthier bottom line.
And getting started may be easier than you think.
Improve vendor management
Maintaining strong vendor relationships and understanding what matters to your vendors is crucial to maintaining a healthy supply chain and growing your business. Happy vendors are more likely to invest time in building good relationships with your business – after all, when you succeed, they succeed. The many benefits of healthy vendor relationships include preferential pricing, improved responsiveness, partnership on new product development, and flexible payment terms.
Ways you can invest in building vendor relationships include:
- Pay supplier invoices on time to reduce vendors’ financial burden and make them more open to discussing early payment discounts
- Invest in a supplier portal with advanced vendor management functionality to centralize and improve communications with suppliers and allow vendors to check payment status
- Implement a vendor document management system to ensure contracts, licenses, certificates, and other documents are up to date
- See if you can get vendors to electronic payments such as Stampli Card or Stampli Direct Pay to speed up payment times and reduce errors and payment costs
Be proactive in building better vendor relationships by investing in an AP automation solution with a vendor portal. By providing your vendors with clear communication, transparency, and a seamless payment process, you can devote your time to finding ways to do better business together.
Businesses that automate their accounts payable processes gain significant advantages beyond optimizing manual paper-based processes. By removing paper from the equation, automation eliminates human error, speeds up invoice processing, and provides real-time visibility into spending.
Automation also has another key benefit. By eliminating tedious manual processes, automation frees your AP team to focus on higher-value work. You can re-assign these employees to more strategic tasks like forecasting cash flow requirements, analyzing spending trends, and improving internal controls to prevent fraud.
Here are the key areas where an investment in automation will pay big dividends:
- Cost savings: automation reduces the cost per invoice by making your AP team more efficient
- Faster vendor payments: streamlining invoice processing, approval, and payments processes lets you reduce DPO and pay vendors on time
- Better vendor management: keep vendors informed and in the loop by centralizing communications with a vendor portal
- Payment flexibility: automated payment solutions let you take advantage of faster and more affordable electronic payment methods like ACH transfers
What Does an Accounts Payable Specialist Do In Their Job?
What is accounts payable management?
Payables management is the handling of a company’s unpaid debts to third-party vendors for purchases made on credit. Account payables management involves tasks such as seeking trade credit lines, acquiring favorable terms of purchase, and managing the timing and flow of purchases.
What are some examples of accounts payable management?
The following are a few examples of accounts payable management. While finding the right vendors is an important part of managing AP, staying actively engaged with them is just as important. A good vendor relationship means that your vendors will keep you up to date on any supply issues or possible price increases.
What is accounts payable in accounting?
What is Accounts Payable? Accounts Payable (AP) is an accounting term that refers to money owed to suppliers, vendors, or employees for goods or services purchased on credit. How do Accounts Payable work?
How do you manage accounts payable?
Here are a few steps to efficiently manage your accounts payable: Establish Policies – Develop a comprehensive AP policy, clearly defining responsibilities and workflows for purchase orders. Vendor Management – Maintain accurate vendor records, regularly review contracts, and negotiate better terms.
