The Accounts Payable department is often considered something of a forgotten branch of the Accounting department. While it plays a pivotal role in ensuring that the company stays in good graces with its vendors, it is often considered to possess simple processes and not require modernization.
In reality, the Accounts Payable (AP) department is often the first line of attack for fraudsters. The common line of attack unfolds as follows:
- Somebody, pretending to be from the established vendor, calls right before the weekly payment run and claims the bank account was recently changed. Could the AP Clerk update the vendor’s information with the latest bank account number?
- The fraudster sounds urgent and convincing, and the vendor is an established vendor known to the AP Clerk, so the AP Clerk updates the account number and makes the payment.
- A few weeks later, when the actual vendor checks in to see when their invoice will be paid, the fraud is discovered.
In addition, by its nature, the AP department interacts with pretty much all other company’s departments. Finding new vendors, approving vendor invoices and tracking actual vendor spend versus budget are done by almost all of the company’s departments. Inefficiencies and broken processes in the AP department are a drag on those departments and are expressed in long times to approve invoices, dissatisfaction with communication and late or non-existent reporting.
For the Accounting department, the inefficiencies in the AP department are especially galling since AP is where the period-close process starts. If the AP department’s processes are inefficient, it might add one to three days to the overall period close.
For the Finance department, whose task it is to provide management reporting, the AP department’s inefficiencies can be felt in the absence of easily accessible data and reports, such as, among others, vendor spend by various categories and the time to approve vendor invoices. The inefficiencies can also manifest in the inability to pay vendor invoices when they are due instead of when they are approved. These issues can necessitate many work hours pulling data together to provide adequate reporting to management.
5 Signs You Could Improve Accounts Payable Efficiency
Do you ever wonder about the efficiency of your AP department? Here are five signs that your AP department is not performing up to its full potential:
- You keep on hearing how invoices take too long to process.
- You pay invoices when they are approved instead of when they are due.
- You do not have a clear picture of how vendors are vetted and on-boarded.
- It takes a significant amount of time to produce reports, and no automatic reports are delivered weekly / monthly.
- Month-end close takes longer than it should.
Underlying Causes & Solutions of Accounts Payable Inefficiency
Now that you know some signs that the department could be improved, several reasons might contribute to why your AP department is not performing to its full potential.
The company does not have set approval policies and procedures.
Are the approval workflows all done within a system? Or are there some invoices that come directly to approvers, who physically write their approval on the invoices and forward them to the AP department?
Can an approver easily see their invoice approval queue without spending too much time clicking on different links or logging into another system?
Best-in-class invoice approval and payment processes are housed within the AP system and incorporate the following steps:
- All vendor invoices come into the central AP inbox, for example, AP_Invoice_Submission[at]company.com.
- Optical character recognition (OCR) reads the invoice into the AP system. If the vendor is established, the invoice triggers a pre-population of the template (containing Department, GL account number, Approver). If this is a new invoice, the AP clerk prepopulates the template.
- The system automatically checks the invoice for being a duplicate and flags it according to the preset rules.
- The invoice is automatically routed for approval to the specified approver in the system.
- If the approver approves the invoice, the invoice is either routed to the next-level approver based on authorization matrix, or the invoice goes back to the AP department to be queued for payment.
- If the approver declines to approve the invoice, this triggers a set of workflows based on the specific reason for the decline (e.g., not the correct approver, not the correct amount).
- The AP department then prepares its weekly / bi-weekly / monthly payment run, selecting only those approved invoices that are due.
- The payment run file is approved within the AP system according to the preset approval workflow.
- The payment run file is automatically sent to the bank after the approval workflow is complete.
Additionally, with such a system:
- Reporting on times that it takes various approvers to approve their invoices is easily accessible.
- Reporting on vendor spend by vendor, vendor class, vendor category or any other slicing of data is easily accessible.
- The invoice payment pipeline is known, which helps with cash forecasting.
The AP system is not connected to the bank, so the payment process is cumbersome.
Modern AP systems exchange payment files and BAI2 files with banks to automate the payment process and confirm that the invoices sent to the banks to be paid were paid. However, many companies still manually extract the payment files from their AP system and manually upload these files into bank portals. This process creates several inefficiencies:
- The manual approval and upload take extra time that could be spent more productively elsewhere.
- The manual process requires that the uploaded payment file be compared to what was approved in the AP system and approved for payment. Since it is usually a higher-level manager (e.g., Controller) that is tasked with this approval, it is an expensive waste of time and resources.
- Paid invoices need to be manually marked as paid during the cash reconciliation process. Depending on how many bank accounts a company has and how many invoices it pays a month, this can be a lengthy and complex process requiring a significant amount of time.
The AP system does not utilize optical character recognition (OCR), and all invoices are entered manually.
As partly described above, OCR significantly reduces the amount of time spent entering vendor invoices. With most invoices, OCR will recognize the invoice sent to the inbox, enter it in the system and send it through the approval workflow. The AP Clerk will code the first invoice from new vendors according to the vendor onboarding documentation, and each subsequent vendor invoice is automatically coded and forwarded to the appropriate approver.
This is in stark contrast to non-OCR entry of invoices, where each invoice needs to be manually entered into the system and manually sent for approval. Depending on the number of vendor invoices the company receives each month, this manual process might necessitate one or several AP Clerk positions.
The General Ledger is not configured optimally for business reporting.
In a recent project, a Client company decided it needed to report P&L by product since it had several product lines that were servicing different segments of the market and thus were priced with significant differences. The company wanted to know if the profit margins on these products were as expected.
It would be optimal to create these new products as members of the Product hierarchy in the ERP. Unfortunately, the ERP was so old that it didn’t allow for Product hierarchy.
The next best case would be to create these products as members of the Department hierarchy in the ERP. However, the company instead created these products as separate GL accounts. As such, the company was not able to clearly track revenue and expenses (which were themselves tracked in GL accounts) by the Product. This meant that the company’s goal of reporting Product P&Ls was not achieved. It is worth noting, that Finance created some spreadsheets that attempted to gather revenue and expense data manually, but it was well known that these spreadsheets weren’t fully inclusive and thus the accuracy of those reports was always under suspicion. Not to mention, the amount of time the reports took to compile was excessive.
Your business has changed, and the AP department isn’t keeping up with the new business needs.
If the company is growing, it is expected that the number of vendors will increase. This sometimes places an overwhelming burden on the AP department because vendor onboarding isn’t automated and thus takes a significant amount of the AP Clerks’ time. This might delay the payment of invoices and jeopardize the company’s relationship with its vendors.
There might also be a significant increase in the number of vendor invoices to be processed. Again, if the entry of the vendor invoices into the system is manual, the burden on the AP department might be overwhelming. In addition, if the approval process isn’t automated and user friendly, the burden on all employees who deal with vendors and approve invoices will increase, sometimes significantly.
Since AP is the first on the period-close checklist, increased processing times will affect the time to close.
Upgrades to Accounts Payable
There are several avenues to upgrading your AP department’s capabilities. The current AP system might be enhanced by:
- Connecting to the bank.
- Formalizing the invoice approval process and making it systematic,
- Reconfiguring GL to allow for new reporting requirements.
Depending on the ERP that your company uses, the systemic enhancements in AP might not require a significant effort to implement. For example, NetSuite has a Suite Apps ecosystem where various third-party apps have pre-built connectors that are so seamless that a user does not even realize they’re not in NetSuite anymore but using a third-party app.
Improve Accounts Payable Efficiency & More
A company that streamlines its AP processes can achieve considerable benefits that may include:
- Managing cash flow most efficiently.
- Controlling risks associated with vendors.
- Lessening risk of fraud.
- Lessening audit pain.
- Easier reporting of ACT vs BUD/FCST, real-time decision making.
- Enforcement of P&Ps.
- Staffing optimization.
- Shorter period-end close.
- Timely reporting.
Since AP touches all departments of a given company, these benefits make life easier not only for Accounting and Finance but also for Sourcing, Inventory, Sales and others.
If you’d like support in improving your AP department’s processes and procedures, 8020 Consulting can help. Our team of 90+ finance and accounting consultants can drive key internal projects or serve in an interim management capacity to support your organizational goals. Contact us to learn how we can help, or visit our finance and accounting services page for more information.
If you’re interested in gauging the overall efficiency of your accounting department, you can also download our free health check resource: