Introduction

Accounts Payable (AP) stands for the amount the businesses owe to the suppliers of goods and services which have been standing on credit. It's very important to manage AP effectively for several reasons like better vendor-business relationships, streamlined cash flow and other operational accounts and reporting. AP involves many steps which shall be discussed further.

What are accounts payable

Accounts payable (AP) is an accounting term used to describe the money owed to vendors or suppliers for goods or services purchased on credit. The sum of any and all outstanding payments owed by one organization to its suppliers is recorded as the balance of accounts payable on the company’s balance sheet, whereas the increase or decrease in total AP from the period prior will appear on the cash flow statement.

It is important to pay close attention to your AP expenditures and maintain internal controls to protect your cash and assets and avoid paying for inaccurate invoices. Maintaining an organized and well-run accounts payable process is key so you remain aware of the effect AP has on your bottom line.

Accounts payable process

The accounts payable process is responsible for paying vendors and suppliers for goods or services purchased by a business. In many cases, the process can be broken down into four steps:

1. Sending the purchase order

The accounts payable journey begins when a purchase order (PO) is sent to the vendor. This formal document outlines all the necessary details, including the purchased items, quantities, prices, and payment terms. It’s the first step in laying the groundwork for the entire accounts payable process.

At its core, the PO ensures that the vendor understands the company’s needs, creating a legal agreement that protects both parties.

2. Receipt of goods or services

Once the vendor receives the PO, they deliver the requested goods or services. The accounts payable team must closely monitor this step to confirm that the items received align with the original order.

By catching any discrepancies early on in the process, businesses can resolve potential issues before invoicing begins.

3. Receiving and verifying the invoice

After the goods or services are delivered, the vendor sends an invoice. This is where the AP team steps in to verify that the invoice matches the purchase order and the receipt of goods. Proper verification ensures that the company pays only for what was ordered and received.

Accurate verification can save a business from costly overpayments or paying for incorrect orders.

4. Matching documents

One of the most crucial parts of the process is matching the purchase order, delivery receipt, and vendor invoice. This ensures all documents are consistent. Document matching helps identify any mismatches early, preventing payment errors.

5. Coding the invoice

Once verified, the invoice needs to be coded. This involves assigning the transaction to the correct account in the general ledger and ensuring that expenses are accurately categorized for proper financial reporting.

6. Routing for approval

Next, the invoice is routed to the appropriate department for approval. This step adds a layer of accountability, ensuring the correct team reviews and approves the invoice before payment.

7. Submitting payment

After approval, the AP team processes the payment using the agreed-upon method—whether it’s via ACH, check, or credit card. A well-managed process ensures payments are made on time, avoiding late fees and maintaining strong vendor relationships.

8. Recording the transaction

The final step is recording the payment in the general ledger, ensuring the transaction is properly documented and reconciled. This closes the loop on the entire accounts payable process, keeping financial records up to date.

What is AP automation?

Accounts payable automation uses powerful technologies to help you streamline and enhance your accounts payable processes from end to end. It begins with electronic invoices, which can be received through a portal, directly from a supplier, or converted from paper to digital formats. The process then lets you rapidly validate master data, and seamlessly match invoices against procurement documents such as purchase orders and goods receipts—which leads to fast approvals and timely payments.

This process reduces the need for manual intervention, which then lowers the risk of errors and enhances overall efficiency. The best AP automation solutions support real-time data processing and confident decision-making—which are critical for maintaining cash flow and financial health within your organization. And when you are faster and more accurate at processing transactions, this not only simplifies your operations but it also strengthens your supplier relationships.

Power up your business with Transfi’s Single API and automate AP process and many other operations to make your business smoother.

Benefits of accounts payable automation

Automating accounts payable and reducing manual data entry can help businesses in many ways. Below are the topmost advantages of AP automation software which we think can help any business:

Comprehensive Cost Savings

AP automation enables comprehensive and across-the-board cost savings. In addition to reducing labour costs associated with capturing invoice data and manual processing, companies also benefit from self-service portals for suppliers, a reduction in duplicate invoices (and duplicate payments), increased cash discount gains (e.g., early payment discounts) and the elimination of late fees due to late payment.

Cash Flow Optimization

An automated accounts payable process that reduces manual processes allows for accurate planning of expected cash needs. Process visibility allows accounts payable to focus their priorities on the activities that most impact cash flow. As a result, all invoices can be paid on time, and dynamic cash discounting also offers suppliers more timely payments in exchange for payment discounts, which can yield significant annual returns. Without automation, dynamic cash discounting may not be feasible.

Improved Relations with Vendors

Accounts payable must reach a large customer base internally and externally. The manual process requires mail and email exchanges with forms that are often difficult to decipher. An automated process simplifies browser-based processing of vendor queries, open items, and approvals. The procedures are available on desktops, tablets and mobile devices while incorporating corporate security standards. Prompt action and communication with vendors will certainly improve the goodwill and long-term relationships that are essentials to grow a business.

Optimize Visibility

Centralized receipt, immediate capture, extraction, validation and routing of data for all invoice types promotes accurate posting of payables. A complete path is created to verify each step and each employee involved in the process. At the same time, management can resolve potential issues as and when they occur. Inquiries and back and forth communication are eliminated as employees, financial management teams, and suppliers have their own self-service access to invoices and payments records.

Improved Internal Controls and Processes

With the world moving to electronic forms of invoicing due to emerging regulation, stringent adherence to internal controls to prevent fraud and ensure the integrity of financial results has become increasingly important. This has expanded the scope of the responsibilities of accounts payable. It is virtually impossible to reliably implement such controls with a manual process. Organizations with manual AP processes rely on audits that add further costs while having limited ability to ensure compliance. With rules embedded in the automated process, accounts payable can reduce the compliance burden, cost and valuable time it takes to keep the workflows running smoothly.

Quality Improvement

An automated workflow with high-quality invoice data that validates it against ERP (enterprise resource planning systems) data ensures accuracy and can help businesses avoid errors (including data entry errors and human error), delays and unnecessary costs. In the case of exceptions that require appropriate steps, this is done within the workflow rather than in a separate process. Such separate processes are often expensive, uncontrolled, untested, and occur without compliance.

Operational Flexibility

Accounts payable processes must support business strategy. This may mean increased transaction volume as a result of growth or acquisitions. "Switching up" is far less costly in an automated process than growing labor costs in a largely manual and non-standardized process. Automation also makes it easier to outsource functions. The process can be easily expanded in the event of mergers and acquisitions, providing efficiency at a low cost.

Accounts payable best practices

1. Simplify the accounts payable workflow
2. Limit access and establish controls
3. Prioritize invoices
4. Make good use of technology
5. Eliminate AP fraud
6. Renegotiate payment terms
7. Reduce verification and signature responsibility
8. Organize vendor data with a supplier portal
9. Look around for discounts
10. Go paperless
11. Automate your processes
12. Check for duplicate payments
13. Review data on a regular basis
14. Keep track of disputes and resolutions
15. Reconcile accounts at the end of each day   

Conclusion

Optimizing and automating AP is becoming a kind of mandate for industry standards. Meanwhile its growing more and more beneficial for businesses, easing the process and distributing a business’s backend work. Along with cost savings and cash flow optimization, it comes with many other benefits for the business.

Frequently asked questions (FAQs)

1. What are Accounts payable best practices?

• Simplify the accounts payable workflow
• Limit access and establish controls
• Prioritize invoices
• Make good use of technology
• Eliminate AP fraud

2. What are accounts payable (AP)?

Accounts payable (AP) is an accounting term used to describe the money owed to vendors or suppliers for goods or services purchased on credit. The sum of any and all outstanding payments owed by one organization to its suppliers is recorded as the balance of accounts payable on the company’s balance sheet, whereas the increase or decrease in total AP from the period prior will appear on the cash flow statement.

3. What are the benefits of accounts payable?

• Comprehensive Cost Savings
• Cash flow optimization
• Flexible operations
• Improved relations with vendors
• Optimized visibility 

4. What’s the accounts payable process?

1. Sending the purchase order
2. Receipt of goods or services
3. Receiving and verifying the invoice
4. Matching documents
5. Coding the invoice
6. Routing for approval
7. Submitting payment
8. Recording the transaction

5. What is the importance of accounts payable?

Any modern business that does not effectively manage its accounts payable (AP) will hurt itself in the long run. Accounts payable for any business is an integral process to manage. In its simplest form, accounts payable are the money your company owes. It could be in the form of bills, invoices, and other pending payments you incur while running a business. These can come from inventory providers, office supplies, bills for services like phone and internet, and the list can go on and on.