How to Create a More Efficient Accounts Payable Workflow

Elizabeth Allen     June 30th, 2022

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While accounts receivable, or the money that flows into a business, often gets a lot of attention from business owners and managers, accounts payable can be put on the back burner, often given barely any thought or consideration. It’s easy to understand why a business might not want to focus too much on accounts payable (AP).

After all, AP handles the money that flows away from a business. It’s responsible for the majority of the payments a company makes, with the exception of payroll. But the strength of your company’s accounts payable department directly connects to the health of your company overall. Finding ways to improve the accounts payable process, to minimize inefficiencies, and to ensure that vendors and other payees receive payment on time (or even early), can help your business save money and time in the long run.

In this article, we will be making a case for just how important a well-oiled accounts payable workflow is to an organization, regardless of industry. Going forward, we will be identifying what an AP workflow is and why it matters, what the steps are, and ultimately, what your AP team can do to benefit from a well-structured accounts payable workflow.

What is an Accounts Payable Workflow?

By definition, an accounts payable workflow is how a company’s financial assets flow comprehensively- from procurement to payment. From the moment your organization decides to purchase a good or service to the minute that check arrives at the vendor, there are many moving parts and the AP workflow determines how each step will be accomplished and when.

The Main Steps of the AP Process

The comprehensive version of your organization’s AP process are unique to your organizational structure, company policies, and infrastructure, but there are five main steps of the accounts payable process it will surely include:

1. PURCHASE ORDERS ARE ISSUED

The first step in the accounts payable workflow is issuing a purchase order. This is when a required good or service is identified and a purchase order is sent to the corresponding vendor. Generally including a description of what is being ordered, order date, quantity, price, requested deliverable date, and price, the PO can come in the form of a paper document or can be produced digitally.

2. RECEIVING REPORTS OR GOOD RECEIPTS

Once the requested good or service has been provided, your company will receive a report or receipt from the vendor. Like the PO, this can be digital or in paper format and will confirm the details of the order.

3. VENDOR INVOICES ARE ISSUED

Once your order has been fulfilled, the next step in the AP workflow is receiving an invoice from the vendor- as the official record that payment is being requested on this order. This document will generally include the amount owed, any applicable sales tax, shipping of freight fees, and a payment due date.

4. THREE-WAY MATCHING

Once the PO, receiving report, and vendor invoice has been received, this is the opportunity to cross-check that what was ordered, received, and being paid for all matches. The process of three-way matching compares the three documents and that is where any discrepancies will be identified and researched further.

5. REVIEW AND PROCESSING OF PAYMENT

Before payment has been made to the vendor, the AP team is responsible for reviewing the invoice to ensure its accuracy, follow any company-designed approval processes, and finally, make the payment to the vendor. Payment can be made via check or an ACH payment directly to the vendor’s bank account.

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Why Your Accounts Payable Workflow Matters

It’s equally as essential to keep a tight handle on the money that flows out of your business as it is on the money that comes in. You don’t want to pay for items or services your business never received or used, nor do you want to pay the wrong companies.

Accounts payable is a crucial team to any organization’s structure. While they seem to be the team working in the background, they truly are keeping the trains running on schedule. Ensuring that supplies are provided in a timely manner can make or break any company’s ability to perform.

Whether it be important medical supplies for a hospital or signs promoting sales at a local retail establishment- without these items, the company is unable to do its job. And it is the accounts payable team that ensures these items are procured, received, and paid for to maximize vendor relationships and minimize any future delivery delays, following the AP workflow in place.

So, while the accounts payable team is a vital backbone to any company, how their work flows through the organization is equally important. Making sure that invoices are processed accurately, on time, and with the correct approvals allows for the continued success of the rest of the organization.

What Happens When Your AP Workflow Isn’t Working?

Knowing the importance of a functioning AP team and an efficient workflow, it’s clear that an AP workflow that isn’t as well-managed can truly hamstring an entire organization. And those issues can roll both up- and down-hill, seriously impacting teams across the entire company in ways that can cause problems for years to come. Having a streamlined accounts payable workflow will help you avoid the following unnerving scenarios.

MISSING PAYMENTS

A misplaced invoice can mean your company inadvertently overlooks a payment. Without an effective workflow, it can be challenging to keep track of all invoices received. Additionally, not having a designated email or P.O. box for invoice acceptance can mean some invoices never make their way to the AP department. And missing even a single payment can negatively impact your relationships with your most crucial vendors.

PAYING VENDORS MULTIPLE TIMES FOR THE SAME PRODUCTS/SERVICES

Without an efficient workflow in place, your accounts payable team might pay the same invoice more than once. Even if the payee credits your account for the excess payment amount, duplicate payments can disrupt your company’s cash flow.

PAYING FRAUDULENT OR INACCURATE INVOICES

Is that invoice from a legitimate vendor? Without a system in place to verify invoices or to recognize vendors, it can be challenging to ensure only genuine invoices get paid.

MISSING OUT ON EARLY PAYMENT DISCOUNTS

Many vendors are willing to offer an early payment discount to encourage companies to pay invoices quickly. Having an efficient workflow process means that your company can take advantage of reduced prices and any potential discounts offered by payees.

LATE PAYMENT PENALTIES

While missing a payment seems like the worst possible outcome, no AP team wants to pay their important vendors late. Not only will many vendors charge a late fee, but a vendor who doesn’t feel confident that they will be paid on time will be less likely to want to do future business with you. A system that ensures your invoices get paid on time will help you avoid the added cost of late payment penalties and any hit to your vendor relationships

How to Improve Your Accounts Payable Workflow

Your accounts payable workflow involves more than the seemingly simple equation of invoices in, payments out. Improving the accounts payable process steps can mean your business consistently pays what it owes and can help improve your overall cash flow.

1. Teamwork Is the Dreamwork

One of the first steps toward improving your accounts payable workflow is to make sure everyone on your team is on the same page when it comes to accepting invoices, creating purchase orders, and working with the appropriate vendors. Collaboration should extend beyond the accounts payable team. You want to make sure anyone who evenly remotely touches outside vendors or payees understands the process, and that the information gets shared with all the appropriate parties.

Collaboration between two departments, in particular, is critical for a streamlined AP workflow: procurement and accounts payable. Procurement is the department that’s traditionally responsible for ordering supplies and services, while AP handles the issuance of payments. At many companies, the two teams often work separately, even though the work of one team intimately impacts the other.

There are several ways to make sure procurement, AP, and other related departments can all collaborate and share information easily. One option is to develop standards for purchases and spending. Team members from across departments should have easy access to the standards and to understand the process when making a purchase or working with a vendor.

Another way to increase collaboration and sharing is to compile a list of preferred vendors. Making that list available across departments will help reduce the likelihood of rogue or unauthorized purchases, and will cut back on the administrative effort of having to constantly onboard new vendors or payees.

A great way to ensure all parties are on the same page is to employ an automated AP solution. Providing access to members from each team guarantees that all information is accurate and updated real-time. With an automated solution, procurement, AP, and any other impacted teams will have perfect visibility into the status of each order and invoice.

2. Digitize Your Data

Paper invoices are easy to lose, damage, or destroy. When vendors submit physical invoices, someone from your AP team needs to take the time to transfer them into your payment system, process the payment, and then record it. A member of your team also needs to verify and review each paper invoice, manually and tediously comparing it to the products ordered or services rendered.

Digitized data minimizes the risk of transcription errors and helps you avoid accidentally under- or over-paying vendors. Digitizing your data also reduces the number of precious work hours spent processing and accepting invoices. There are multiple ways you can go about digitizing your data.

One option is to encourage suppliers, vendors, and other payees to send in electronic invoices. Vendors can email PDF versions of their invoices to a dedicated, monitored email address. From there, the software can scan the information on the invoice, such as line-item details and header data, to absorb it into the system.

If you have vendors who prefer to send in paper invoices, you can still digitize them. With a lockbox system, vendors can send their paper invoices to a designated P.O. box. From there, the invoices get scanned and analyzed for any errors before being passed on to your team. Another option is to batch scan paper invoices so that the information becomes available electronically in a format that AP software can easily and accurately interpret.

In addition to digitizing the process of collecting and reviewing invoices from vendors, you can modernize the payment process. Rather than having to issue checks, which need signatures and approvals, your business can pay vendors with ACH or direct deposit. Since the funds from ACH or direct deposit end up in the bank accounts of payees almost immediately, there is no need to worry that a check has gotten lost in the mail or that a payee has forgotten to deposit it.

3. Keep Your Accounts Payable Information Centralized

Many hands make light work, but in some cases, they also create confusion. Centralizing the accounts payable workflow reduces the number of people who might come into contact with an invoice, as well as the likelihood that an invoice will get paid multiple times (or, worse case, not at all). Identifying a single location for invoice submission, whether it’s an email address or lockbox, and setting up a system to track and record any activity on an invoice will help eliminate missed or multiple payments.

A centralized AP system can be particularly valuable for larger companies, companies who are likely to work with vendors across multiple departments. It is also very useful for small companies, who typically only have one or two individuals handling the full accounts payable workflow.

Since a centralized system typically includes digital invoice collection and submission and automated payment reminders, it reduces the amount of effort your team puts into inputting invoice data and making sure payees receive timely payments.

Another benefit of centralizing AP information is that it encourages everyone to get on the same page. If a member of the procurement team has a question about an invoice or wants to confirm payment on a purchase, they can log into the centralized system, quickly look up the invoice, and discover everything they need to know. Providing internal team members with easy access to invoices and other AP information will help streamline the process, reduce questions and confusion, and eliminate duplicates.

4. Instill Internal Controls

Since accounts payable is the department that manages the money leaving a company, it tends to be the department that is most frequently a target of fraud. On average, companies lose about five percent of revenue in a year because of fraud. One of the most common examples of fraud is asset misappropriation, which includes billing schemes, check tampering, and falsifying expenses.

Vendors can commit fraud, as can your employees. Putting internal controls in place can help dramatically reduce the risk of fraud. One example of internal control is a defined process to verify all new vendors. Internal controls can also help you verify that invoices are from an approved vendor and can detect and flag any invoices that seem suspicious. Among the criteria you can use to verify vendors and invoice, some include:

  • Approval: Has a member of your team entered the vendor into the system and approved them? Is it from your list of preferred vendors?
  • Address: Does the vendor’s invoice include a legitimate business address, or does it seem to be a residence? Another flag to screen for is whether the vendor’s address matches or is similar to an employee’s address.
  • Inaccurate information: Do the products or services for which the vendor is charging you match up to the products or services received? Have they submitted an itemized invoice that breaks down the cost of each product or service?

Having internal controls can also cut down on reimbursement and payment fraud. For example, your business can implement a system to verify that an employee used the expenses they are claiming for business, rather than personal, reasons.

Sometimes the simplest way to detect and stop fraud is by confirming that you are being asked to pay for what you requested and received. Automating a three-way match system allows you to automatically compare existing POs, receiving reports, and vendor invoices. And as an automated three-way matching process removes errors and delays from the process, you can rest assured that you’re paying only the invoices you should be.

5. Invest in AP Automation

Before you decide to move forward with an automation solution for your accounts payable workflow system, it may be helpful to imagine how it would actually work for your company. An accounts payable process flowchart looks something like this:

  1. VENDORS SUBMIT INVOICES TO YOUR COMPANY FOR PAYMENT
  2. INVOICES GET PUT IN YOUR COMPANY’S SYSTEM 
  3. INVOICES RECEIVE APPROVAL, REJECTION, OR GET SENT BACK TO THE VENDOR FOR CLARIFICATION
  4. THE AP DEPARTMENT AUTHORIZES PAYMENT OF APPROVED INVOICES. 

In the past, a human would need to play a prominent role in each step of the invoice process, often being responsible for supervising the entire workflow from end-to-end. Someone would need to receive the invoices, input the data, manually approve, reject, or follow up on them, and finally issue the payments.

AP automation software streamlines each step. No longer will a team member need to take time out of their busy day for time-consuming tasks such as data entry and review. Instead, with AP software, a computer program takes care of each step for you.

Automation software reads the invoices, identifies the relevant information, and tells you what needs to be addressed further. If something seems strange about an invoice, it will be flagged for review or automatically sent back to the vendor for correction. And as an added bonus, AP software recognizes invoices already paid, reducing the risk of duplicate payments.

8 Reasons for Adopting an Automated AP Workflow

AVOID LATE PAYMENT PENALTIES

Paying your vendors on time means fewer late penalties impacting your company’s bottom line. And automating your AP workflow process with a solution like MHC NorthStar ensures that there are fewer delays in processing, routing, and approval. Getting your payments to your vendors on time, every time.

TAKE ADVANTAGE OF EARLY PAYMENT DISCOUNTS

While a nice-to-have, many AP teams still bogged down in manual work simply don’t have the capacity to attempt to benefit from the early pay discounts many vendors offer. When you automate your accounts payable process with MHC NorthStar, you can identify automatic payment dates that will have your company reaping those additional rewards.

GREATER PROCESS EFFICIENCY

With an AP workflow solution like MHC NorthStar, each step of the process is automated. AP managers no longer have to worry about the workforce energy expended on manual data entry or running an invoice around the office for approval. Get invoices through the system more quickly and free your team up for more value-added tasks that benefit the entire organization.

IMPROVED DATA ACCURACY

Typos are human nature. Whether it’s a transposed number or a simple case of “fat fingers”, inaccurate data can negatively affect an AP team. Engaging a solution like MHC NorthStar, automation can ensure that all incoming data is correct.

INFORMATIVE AUDIT TRAILS

When audit times comes, it’s nice to be able to quickly produce information on all the invoices you have processed over the past few years. With MHC NorthStar, you can run reports at the touch of a button that will show the journey of the entire invoice- from receipt to payment.

ENHANCED VISIBILITY

Too often, AP teams are saddled with nonstop calls from other departments, requesting information on invoice status. Gift your personnel back that time by using an automated AP workflow solution like MHC NorthStar, granting access to any necessary party so everyone has visibility to the entire invoice process.

REDUCED FRAUD RISK

Many times, the catalyst for fraud was one simple mistake. Data entry errors in invoice processing can easily open an organization up to the whims of less-than-credible vendors, ready to take advantage of a perceived hole in your system. An AP automation solution like MHC NorthStar removes the touchpoints where errors can occur, while providing easy ways to verify vendors, invoices, and payments.

HIGHER EMPLOYEE MORALE

With the threat of The Great Resignation looming over all corporations, engaged and fulfilled employees are a priority to a lot of organizations. With the tedious and manual work typically required of AP team members, this role is at a particularly greater risk of falling prey to increased resignations. Using solutions such as MHC NorthStar to reduce the manual element of their job will allow them to pursue more engaging tasks that keep them loyal to your company.

Contact MHC to Revolutionize Your Accounts Payable Workflow

Improve your organization’s bottom line while creating a happier environment by leveraging the power of accounts payable automation software. With MHC NorthStar, you can transform your end-to-end workflow process to the goal of greater efficiency, accuracy, and productivity.

Learn more about our solution to the problem of improving accounts payable workflow and how your company can harness all it has to offer. Contact us today to see MHC NorthStar in action.

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