BMS

To stay in business, your company must pay its bills. Failure to do so or to not do it in a timely manner will make your creditors extremely unhappy and seriously jeopardize the business relationship you have with them as well as negatively affect your company’s overall credit rating.

This is where the Accounts Payable (AP) function comes into play and why it is so important to the success of your company.

What is AP?

So exactly what is AP? A company normally doesn’t pay cash up front when ordering the goods or services it needs to operate. Thus, your company purchases something on credit and will pay for it later.

This liability incurred usually must be repaid within a relatively short time-frame to avoid defaulting on the debt. Defaulting would not be a good thing at all, of course.

One thing to keep in mind as a frame of reference is that we, as individuals, often use AP in our daily lives as well whenever we purchase something on credit and have to take the necessary step to pay off the debt in the time-frame stipulated.

Getting behind in our consumer payments or, worse, not paying at all, will do serious damage to our personal credit rating. Naturally, the same thing is true for companies and their credit standing as a business.

Role of AP and What an AP Specialist Does

In your company, you will want to utilize an AP Specialist, a type of accounting clerk, to properly carry out this extremely important function. An Accounts Payable Specialist is a crucial member of your company’s overall finance team.

He or she has is responsible for making sure your company’s bills are paid and all associated transaction activities are recorded. In doing so, the AP Specialist must keep track of all payments and expenditures.

These include things like purchase orders, invoices, statements, and payroll. To reconcile processed work, your AP Specialist must verify entries and compare system reports to balances.

In addition, to keep your company in good standing when tax time comes, the AP Specialist must produce the financial transactions, records, and bookkeeping needed by your accountants and auditors to prepare the company’s tax return.

Example of Use of AP

An example of when AP comes into play would be when a hardware store stocks its shelves with various products that it gets from a wide range of vendors/suppliers. Those items comprise the store’s overall inventory and thus are part of something called trade payables.

If this hardware store owes money to any vendors/suppliers, this situation falls into the category of short-term debts or obligations within AP and must be treated accordingly.

The End-to-End AP Cycle

The full AP Cycle consists of an end-to-end process that requires your company to match documents, approve invoices, issue checks, and record payments. This cycle involves all those steps needed to receive, process, and pay vendor/supplier invoices.

Included in the AP Cycle is the Procure to Pay (P2P) Process that is used for obtaining any raw materials your company needs for providing a service or manufacturing a product and then paying for these.

P2P involves everything from Vendor Master Maintenance via procurement and Vendor Invoice Processing, which as the name suggests, is when your company processes payments to external vendors/suppliers and conducts period closing activities.

The Payment Process

AP handles all of the processing of your company’s invoice and non-payroll payments These fall into 5 different categories:

• Vendor Invoices (e.g. for equipment, supplies, service agreements, and other purchases made to vendors paid against a Purchase Order)

• AP Payment Request Form (e.g. payments made to non-trade vendors or for those situations in which there isn’t a standard ‘invoice’ such as refunds, utilities, conference registrations, and training stipends)

• AP Recurring Payment Request Form (e.g. for 3 or more payments made on a recurring basis such as fellowships, rents, or training stipends)

• AP Honoraria Request Form (e.g. for those situations in which it’s customary to make an honorarium payment such as for a mentor, advisory board member or guest speaker)

• Wire Transfer/Foreign Currency Check Request (e.g for international payments that have to be sent via foreign currency or wire transfer)

Debit or Credit or Both?

It’s all about balancing things out. When your company pays one of its suppliers/vendors, the amount involved is included in AP. So in order to ensure that the credit balance is decreased, you will need to debit AP.

This is necessary because AP is a liability account, which means it must have a credit balance.

Any time your company purchases additional services or goods on credit, instead of paying with cash, AP must be credited so that credit balance increases in turn.

So, to make your company’s balance sheet come out correctly, AP must include both debit and credit entries.

Purchase Order Invoice

In most cases, your company will use a document called a Purchase Order (PO) created by you, the buyer, to authorize a purchase transaction. The PO has a unique PO Number that your company defines, which is usually a number that matches the one used on the invoice provided to you by the vendor/supplier.

To enable your company to properly balance its books, you will use a process called 2 Way Matching. The way this works is that whenever you get an invoice from a vendor/supplier for payment of services or goods that were ordered via a PO, AP creates an invoice that matches the PO.

Non-Purchase Order Invoice

Whenever a PO is not required, such as when an invoice falls under the Direct Buy Limit, your company will use a Non-Purchase Order (Non-PO) to make a payment to a supplier/vendor.

This payment method is beneficial in terms of allowing faster payments and better transparency of the invoice payment process.

Recording Expenses Using Journal Entries

Whenever your company incurs expenses from the purchase of goods or services and receives a bill or invoice from a vendor/supplier, you must record those expenses in AP (or Trade Payables).

This is journal entries that properly debit the asset or expense account to which a purchase relates and in turn credit the AP account. Simply put, when you pay a bill, be sure to debit AP and credit cash.

A word of caution is in order. Since on the balance sheet AP is considered to be a current liability, not an asset, you should keep individual transactions in the subsidiary ledger of AP.

This is important because you don’t want to under-represent your company’s total liabilities, which would result in you overstating your net income in financial statements. Accuracy in financial statements is paramount, of course.

Summary

Accounts Payable is the primary department in your company that processes invoices, also known as P2P as part of the overall, end-to-end AP cycle. AP takes care of the processing of all incoming invoices from the time they arrive until the time they are posted and thus makes sure your company pays its bills in a timely manner.

The bottom line is that AP, as carried out by your AP Specialist, is a vital component of your company’s overall financial team and helps ensure the success of your business.

When an accounting department processes payments, it may seem like a relatively simple process that does not involve a lot of red tape. However, there are some areas that can arise that warrants the need for an invoice approval processing system to be put in place. Putting an invoice approval system in place and maintaining it is a way that the accounting department can assist with a company’s overall internal controls and minimize over-payments.

What is an Invoice Approval and Invoice Approval Process?

An invoice approval involves the authorization of a check before it is approved for payment. Before the check can be approved, it must go through a verification process that often involves a variety of documents.

Invoices are paid for goods or services performed on behalf of the company. It’s also used to pay for on-going administrative expenses to vendors, such as rent or lease expense, telephone expense, business loans, insurance, and other business expenses.

The invoice approval process can often involve many different departments, as requests for payments are generated from different internal (as well as external) sources.

Various departments have their own workflow and procurement processes. For example, the sales department may require that some items are purchased by utilizing workflows within their sales and purchasing department. Sales orders may be fulfilled using inventory items currently on hand, whereas other orders may require that a new purchase be made to fulfill a sales order. Each of these methods could require approval for payment:

1. A payment for inventory currently on hand that may still have an outstanding balance.
2. A payment for the recent purchase made to fulfill the new sales order.

A different department may be required to purchase office supplies for the entire company, which would require a completely different workflow. That’s why it’s important for the invoice approval process to be properly integrated with other internal departments.

Why an Invoice Approval Process is Necessary

It’s important for a company to have an invoice approval process in place for a variety of reasons. For example, it is necessary because it:

• reduces errors
• reduces under, over, and double payments
• reduces or eliminates payments for unauthorized products or services
• helps to manage cash spending by allowing invoices to be paid based on the monthly budget
• helps to the accounting department monitor due dates and reduce late fees
• allows the payable department to take advantage of discounts for invoices with certain payment terms
• prevents or reduces invoices from being overlooked and slipping through the cracks

In addition to the items listed above, the invoice approval process also allows companies to have checks and balances in place. Oftentimes, the accounts payables department is the last line of defense with respect to ensuring that all invoices are processed with accuracy.

Many people do not consider all of the areas that could be impacted without having an invoice approval process in place. Accounting departments that do not have an invoice approval process in place tend to have less control of their cash flows.

Create a Paper Trail

When processing payments, it’s very important to create a paper trail. In doing so, it allows management and members of the accounting department to visibly see each step of the approval process. It also allows them to determine whether or not a step has been overlooked and missed altogether.

When invoice approval systems are set in place, it makes it easier to refer back to any part of the process should additional information need to be verified. This is particularly important during an audit. It allows companies to refer directly to various documents upon request.

Enhancing and Streamlining the Invoice Approval Process

Managing and processing invoices for approval can be streamlined if the following three areas are implemented:

1. Automation
2. The use of Purchase Orders and Receipts
3. The use of Contracts

Automation

Whenever automation is added to a system, it speeds up the process significantly. It allows others to access information at various stages of the invoice approval process. Having an automated system in place also reduces the accounting staff from being interrupted by other staff members, vendors and independent contractors regarding the status of outstanding invoices.

When considering automation to approve invoices, features such as email notifications, the ability to upload and download documents, and the ability to view updated information through computer software programs also enhance the overall invoice approval process as well.

The use of Purchase Orders and Receipts

When setting up automation procedures, you can also include an automation process to generate purchase orders then match them to the proper invoice. Whenever a purchase order has been generated, its an indication that the purchasing department has already approved the purchase and thus the purchase order should be a means to verify authorization for payment at this stage of the process.

Concerning the use of receipts, just as invoices can be matched up to purchase orders, invoices can be matched to receipts as well. Examples of receipts include items purchased using a credit card, plumbing services, computer repair or other services not normally utilized on a regular monthly basis. Although these receipts should still go through the authorization process, automating the system can create a paper trail in addition to significantly reducing the overall invoice approval process.

The approval process can be set up in such a way that receipts that are matched to invoices can be processed a lot faster than invoices without a receipt.

Contracts Agreements

A contract agreement is another source that is used to determine how much a partner, independent contractor or other business associates should be paid. It should spell out the terms of the agreement, which should then be used to create an invoice. The contract-based invoice must also go through the approval process. Based on the type of industry, some agreements involve the payment of royalties.

Additionally, invoices that are less than a certain dollar amount or threshold can sometimes bypass the approval process altogether. For example, invoices that are less than $50 may not need to be approved and can be submitted for payment right away.

What’s Involved in the Accounts Payable Invoice Approval Process?

The invoice approval process involves the accounts payable department is presented with an item that requires payment but that must first be verified to determine it’s legitimacy. Sometimes invoices get crossed in the mail and duplicate invoices are mailed out. Duplicate invoices are one of the major causes of overpayments, which is why it is important to cross-reference invoices prior to making a payment.

After an invoice has been verified and approved for payment, it can then be scheduled for payment. Scheduling an invoice for payment takes place by adding the item to the accounts payables open invoice or aging report. After the invoice has been approved payments can be made during certain times of the month or upon receipt. Payment due dates depend on the accounting policy at each company.

Processing and Approving Rush Invoices

Invoices that requires payment right away may have a different verification process to expedite the payment. A different system could be processed to move a particular request for payment, further along, to ensure the payment is made on time as requested.

How to Reduce Bottlenecks

Sometimes the invoice approval process could become bottle-necked. When this takes place, there should already be manual systems in place to keep processes flowing.

Those who work in the accounts payable department should continue the overall approval process while maintaining efficiency.

To conclude, when finalizing your invoice approval process, it should be designed to implement internal controls while setting up systems to expedite the overall approval and payment process. It should also be set-up based on workflows and how you run your business in general.

You can’t run a business without spending because it comes with the package. You’ll need to buy stuff to fully operate your business. The majority of suppliers provide invoices whenever you purchase from them. Unfortunately, this can get chaotic along the way especially during busy days. How do you stay on top of things? If you don’t manage your invoices well it could result to unnecessary fees, late payments and quite possibly broken relationships. Avoid these by learning how to improve your accounts payable system.

The following are important steps that you need to do so you can finally take charge of your payables.

Choose To Go Paperless

Gone are the days when business owners had to manage piles and stacks of paperwork because now that we are living in the digital age, you can go paperless and still be able to organize everything. Electronic bills are just the same as paper, only they make the process ten times easier. With paper, there’s a possibility that it can get damaged or lost but with online billing, the invoices will always be available thereby lessening the chances of late payments and lost hard copies. When a vendor asks if you want paper or electronic invoice we encourage you to take the latter.

Create A System For Your Accounts Payable Workflow

The secret to an effective accounts payable system is repetition. Create a system that will allow your business to manage your invoices well from the moment you receive the invoice until the time you are able to pay for it. Find a place to safely keep all of your invoices and streamline them according to priority and date received.

Make Reminders

Busy people can easily get sidetracked and that includes you, especially during peak season. To keep all your invoices organized we suggest that you set up reminders so you can pay for everything before their due dates. These reminders will also let you know how much money you need to prepare for the payments. A majority of business owners use a calendar to organize their invoice dates, creating alerts to let them know when the due date is near.

Document Your Data

It is very important that you develop the habit of documenting your data so you can keep track of your invoices. As soon as you receive a bill, document it and save it in your file online. Examples of such documents include receipts, notices, purchase orders and of course, invoices. Saving these documents will keep you updated on how much money you are shelling out and who you are paying.

Make Sure All Contact Information Is Updated

At some point you’ll need to communicate with your suppliers and your vendors. The last thing you’d want is to spend time searching for their contact number. To make sure the process is smooth and efficient we recommend that you regularly update all of your vendors’ and suppliers’ contact details including their phone numbers, mailing addresses and their email addresses. Keep all these pieces of information in one place. Similarly, your vendors and suppliers also need to reach you so make sure that you inform them if you plan to change numbers, email address and mailing address.

When you are operating a business, especially if you have been in the industry for quite a while, you know that managing invoices and making payments can be burdensome. If you do not have an established system in place, it can get crazy and you might find yourself paying for fees as a result of delayed payments. If you follow these tips mentioned here you can take it easy and feel less stressed knowing that everything is paid for before its due date and every receipt, purchase order and invoice is saved in a designated online folder.