What is Accounts Payable?
Accounts payable (AP) or “payables” are the bills that your business needs to pay. Within a business, accounts payable refers to the team responsible for processing invoices and paying bills – which is how we’ve addressed accounts payable here.
Having an accurate, real-time insight into your payables is vital for AP department to understand the company’s financial status, effectively manage cash flow, and plan for long-term growth. To support this, AP teams work closely with other teams like the treasury and procurement departments.
There are countless cost scenarios that accounts payable teams manage, but a few include equipment, utilities, subcontractors, materials for production, and transportation and logistics.
The managed process involves:
- Receiving invoices
- Verifying invoices
- Coding invoices
- Making payments
What process does the accounts payable team manage?
The process the accounts payable team typically follows:
- The purchasing business submits a purchase order or signs a contract for the provision of services with a supplier.
- The goods or services are delivered.
- An invoice is submitted by the supplier to the purchaser’s accounts payable department.
- The invoice is recorded in the company’s accounts payable ledger.
- The accounts payable department requests approval from the relevant team or individual to pay the invoice (and ensures proper coding of the invoice to the required cost centers).
- The payment is processed, within the agreed timeframe to avoid late fees, interest, or penalties.
Why is accounts payable so important?
Ineffective and poorly managed accounts payable processes can have a negative impact on your business as a whole. Some examples include:
- If you don’t have an accurate picture of how much money you owe, you can’t understand your overall financial situation.
- A poor accounts payable process can make it significantly more difficult to make accurate financial projections and gain investment or funding.
- Missed or late payments can result in late fees, penalties, or interest.
- If you develop a reputation for having a slow or inaccurate accounts payable process, you may find that suppliers and vendors are unwilling to work with you. This can damage your supply chain as well as your reputation.
What is the difference between accounts payable and accounts receivable?
Accounts payable is the team responsible for the money the business owes, while accounts receivable handles the money owed to the business. The company providing the product or service lists the debt as accounts receivable on its balance sheet, while the business making the purchase lists it as accounts payable.
To maintain good cash flow and steady growth, businesses should aim to keep their payables and receivables as balanced as possible.
What is the procure-to-pay lifecycle?
Accounts payable is only a portion of the procure-to-pay or P2P lifecycle, which is defined as the process of requisitioning, purchasing, receiving, paying for, and accounting for goods and services. Accounts payable teams that align with procurement see the mutual benefit in making the entire P2P process work efficiently and effectively.
What is Accounts Payable Automation?
AP automation optimizes the accounts payable processes by offering a host of benefits for businesses, including cost savings and processing efficiencies, reduction in errors and exceptions and the ability to optimize working capital through the capture of early payment discounts
AP automation also makes the invoice approval process quicker and more efficient. By identifying the correct approvers, sending notifications and reminders automatically, it streamlines the process and removes unnecessary human involvement. It also means that key documents are stored in one place and are accessible to all relevant team members.