When a company purchases goods and services from a supplier or creditor on credit that needs to be paid back in a short period of time, the accounting entry is known as Accounts Payable (AP). On a balance sheet, it appears under current liabilities. In a company, an AP department is responsible for making payments owed by the company to suppliers and other creditors.
In most cases, accounts payable fulfills at least three basic functions:
– Business Travel Expenses
– Internal Payments
– Vendor Payments
The accounts payable department is essential to any business as it ensures the bills are paid on time. When a company starts, it might have a few invoices per month but when it grows, so does the number of invoices. Large companies process more than 50,000 a month. That’s why implementing a structured process is important. Generally, these are the steps:
Reception of invoices: Usually, companies have previously sent a document stating all the information the vendors needs to provide and in which format (PDF, JPEG, PNG etc.)
Extraction of vendors information: If the company is manually processing this step, employees are required to extract the vendor’s accounts number, the amount required, date and that all the information is matching requirements to the purchase order.
Updating Records: Accounts payable is all about recording information. If not, a company will find itself replicating payments. This stage is crucial to properly handle all invoices. Generally, managerial approval is required here in order to confirm that all information has been recorded properly.
Making Payments: Again, this step is very different whether it is processed manually or automated. Manually, companies might rely on a group of employees that ensure the payment on time of all invoices. Although that might work for very small companies, it is better to get this step automated so that every payment is done automatically at an agreed date, especially for regular payments.
4 Accounts Payable Metrics That Should Require Your Attention
When dealing with invoices, a company should know key information such as the time it takes to process an invoice or the cost it requires. Without this data, it won’t matter if processes are improving as there is no data available to do a comparison. Here are 4 factors that any company should look for when dealing with accounts payable.
1. Average Cost Per Invoice
The average cost per invoice is $20 which included invoices with exceptions and non-PO invoices which might costs slightly more than clean ones. The actual situation is that some companies have their accounts payable automated and can process invoices at a cost of $3 per invoice while others still rely on manual methods and could process their invoices at a cost of $25.
2. Average Invoice Processing Time
Processing an invoice, from reception to payment, takes a lot of different steps and involves several individuals. Estimates of the average invoice processing time vary from one company size and type to another, but the average time is 16 days. Here again, the gap between automated and manual processes is great. High performing companies will process an invoice in as little as 3 days when laggards will take up to 20 days, sometimes more. Some new solutions enable employees to process these invoices even from their phones so that they can make payments while being on business trips.
3. Late payments and penalties
Depending on a company’s situation, this might be an everyday reality. The higher this percentage is, the more the company is paying late fees and statutory interests.
4. Benefits of Automating Processes
This point would have been a bit more complicated to justify 10 years ago. At that time, automating processes could take up to 18 months or more and be very costly. Obviously, after a certain period, ROI would appear, but it was a big step for any company willing to improve its structure. Nowadays, that same process can take 12 weeks and be accessible for any type and size of company.
Here are some traps you should avoid at all costs:
Poor data entry: This might sound silly but about 70% of companies out there are struggling at this essential stage. If you are still using spreadsheets to record information, chances are that you are part of this group.
“88% of Excel spreadsheets used by businesses contain significant errors”
Replicate Payments: No one wants to pay twice for one product or service and yet this mistake is one of the most common ones in accounts payable. Make sure you can tell when an invoice has been paid, set up a reconciliation report or take the time to doublecheck every invoice. Don’t expect your vendor to tell you it’s been paid twice, especially if he is also struggling with his accounts. Truth is he might not even be aware of it!
Rely on manual processes: Given the complexity of the task, relying on manual processes is the same as shooting yourself in the foot. You will lose time, money and mental health. Depending on your company’s size, the necessity of automating processes could range from ‘required’ to ‘vital’ but one thing is sure, at some stage, you will need a more reliable system than excel spreadsheets and emails. Just bear in mind that processing invoices manually costs on average ~$20 against ~$3 once automated.
Whether you are interested in automating your company’s structure or just curious about accounts payable, the key lesson from this article is that accounts payable is nowaday relying heavily on technology, and solutions are now much more affordable than it was formerly. If you are on the edge to improve your processes, make sure you do it from an IT perspective as digital transformation is the key to take advantage of your competitors.