Strategies For Optimizing Accounts Payable

For many businesses, the accounts payable department doesn't get a lot of attention unless something goes wrong. However, there's a lot to be gained from the accounts payable department that is well run. Conversely, there's a lot of problems that can come from one that is merely limping along. This department often has an enormous effect on a business' cash flow, and there are opportunities that can be gained or lost from taking advantage of payment agreements with suppliers.

A well run accounts payable department should be able to take advantage of volume discounts and early payment discounts as well as determining the best way to keep the most cash available to a business for other expenses and investments. This department should also be able to ensure that suppliers are meeting their obligations based on agreements and contracts, so if volume or quality standards aren't met, issues are resolved and appropriate corrective actions are taken.

Common Accounts Payable Problems

Although there are numerous opportunities for cutting costs and freeing up cash, there are also a number of obstacles that businesses face when attempting to achieve these goals. Canon's 2014 Accounts Payable Optimization Study found that paper processing was one of the largest sources of problems for many organizations, with the time it takes to deal with paper invoicing being the biggest issue.

Other major sources of concern were:

  • Ensuring that payments are made on time
  • Streamlining the invoice approval process
  • Obtaining the best payment terms with suppliers and making sure that obligations are met on both sides
  • Dealing with a variety of supplier accounting and invoicing systems
  • Recording and verifying the security of data and transactions

    Many of the issues listed are made worse or created by a reliance on paper invoicing. Lost paperwork is a frequent problem in many organizations, leading to late or missed payments. Additionally, while a number of businesses are interested in digitizing their paperwork, the majority of suppliers are still mailing paper invoices or sending them by fax.

    Most small businesses handle their own accounts payable paperwork, and much of this is done manually. Since few suppliers have switched over to electronic billing, most organizations are spending large amounts of manpower manually entering data and creating digital copies of documentation.

    Use of paper documentation frequently slows down the invoice approval process since copies have to be made and delivered to the appropriate members of management for review. When paperwork is not easily accessible or available in a digital format, it is a challenge to analyze data and ensure that the best payment agreements are being obtained and that obligations are being met. On time and early payment discount agreements can easily be lost if businesses are not able to make payments when they are required to, so issues related to paperwork can be costly.

    Improvements and Optimization

    Due to the fact that a number of issues related to the proper running of accounts payable departments stem from the same root causes, there are also a few adjustments that organizations can make that will take care of many concerns at the same time. Three of the most effective ways that businesses can streamline their accounts payable department processes are to:

    • Use object character recognition to digitize paperwork
    • Take advantage of online portals that are accessible to suppliers
    • Create management workflows

    OCR

    While many companies routinely take advantage of scanners to create digital copies of paperwork, this generally only involves creating an image of a document that is saved on a computer. This means that information still needs to be entered manually into a database, so while the loss of records is less of an issue, it is still time-consuming.

    Object character recognition, or OCR, involves scanning a document and retrieving data from it. This data can be automatically added to a database or spreadsheet. The OCR process helps to reduce the issue of manual data entry errors and allows information to be entered as soon as the paperwork is received. OCR takes about the same time for an employee as scanning a document to create an image file, and it generally doesn't require any extra steps. Per Gartner, there are organizations that are able to post 80 percent or more of their invoices without an employee having to be directly involved.

    Supplier Portals

    Streamlining the process for entering invoices and data into a centralized system can enable businesses to create or take advantage of an online portal that allows a business and its suppliers to track orders, look at invoices and see when payments are made. Making this data available to a number of individuals in an organization can help ensure that the accounts payable department has proper oversight, and it can help speed up the time it takes to approve invoices. Letting suppliers access the portal enables these businesses to submit invoices and track payments as well as be made aware of any issues with supplies received or invoicing issues.

    Establish Workflows and Processes

    However an organization decides to handle their data management efforts, it's important that there is an established process in place for managing accounts and payments. This enables businesses to ensure that operations are working and figure out alternatives if they are cumbersome or lead to errors or delays. According to Deloitte, these processes should detail what the accounts payable department does when it receives an invoice, how data is input and shared and what the process is for getting invoices approved. There should also be guidelines for determining the best ways of dealing with paying different types of suppliers.

    While many suppliers offer discounts for payment within 30 or 90 days, it may not be worth the discount if doing so inhibits an organization's cash flow. It's also essential that there is a way to verify that both the company and suppliers are meeting the prescriptions of a contract or agreement. Establishing workflows for dealing with these issues can help organizations make the right choices.

    When suppliers are not delivering on time, in sufficient amounts or appropriate quantities of stock, companies may not want to pay invoices until these matters have been resolved. A workflow can be critical in establishing what should be done when these issues arise. Additionally, payments to suppliers also need to be made on time to prevent losing discounts or incurring penalties for late payments. Each supplier agreement needs to be documented and updated as things change, and processes should ensure that each account is handled appropriately.

    Creating workflows may also help a company:

    Outsourcing

    Digitizing records, implementing OCR and using a portal that suppliers have access to may not be something that is necessary for smaller businesses, but organizations should not assume that the cost will prevent a business from being able to take advantage of them. While the cost of setting up and maintaining electronic systems may be prohibitive for many small and medium-sized organizations, doing so in-house is often not necessary. There are a variety of third-party providers that organizations can outsource these tasks to. Organizations can get outsourced assistance for everything from setting up an OCR process to helping a company create workflows for analyzing supplier contracts.

    While organizations may not be able to foot the costs of implementing a variety of IT systems on their own, having a third-party handle them is often very affordable. Businesses will need to compare the costs of using outside parties to develop these systems against the potential savings and value of freeing up cash, but outsourcing allows organizations to take advantage of technology and systems that would normally be too expensive.

    • Ensure that purchase orders are created for each new order
    • Verify that invoices match products received and meet contractual agreements
    • Check records to ensure that payments are made, that they are made on time and that they are not duplicated
    • Determine the best method of paying invoices, such as through EFTs or credit cards, to reduce fees