The Accounts Payable Process: Everything You Need to Know [Infographic]
MHC Team 
February 9th, 2021
Accounts payable is integral to every business, no matter the size. But unless you’re in the thick of it day to day, most people don’t know precisely what goes into the actual process of accounts payable. And it’s difficult to streamline or improve that process without knowing the details.
In this article, we’ll walk you through the key steps of the accounts payable process—from purchase orders to payment processing— and point you in the right direction for improving yours. We feature an infographic of the full AP process as well as walkthrough of each of the main steps involved.
When Is the Accounts Payable Process Used?
The accounts payable process is used whenever an organization has to pay any sort of third party. That third party might be a vendor that supplies the parts a business needs to build their product, or a contractor that’s providing a service to the organization or their clients. It covers essentially all payments a company makes aside from payroll for internal employees.
What is the Full Cycle of the Accounts Payable Process?
The full cycle of the accounts payable process includes the following steps:
- Purchase orders
- Receiving reports or good receipts
- Vendor invoices
- Three-way matching
- Review and processing of payments
However, before the accounts payable process can even begin, your business will need to first get its ducks in a row, as it were. First, internal accounting systems should have a chart of accounts, a register of all a business’s accounts, set up. Next, all vendor accounts should be set up, too, including information like name, billing address, billing frequency, vendor ID, etc. Once those things are in order, the accounts payable process can start in earnest.
AP Process Infographic
Take a look at the infographic below covering the full AP process to see and then read on as we go into each step and what it entails.
1. Purchase Order
The first step in the accounts payable process is sending out a purchase order (PO). For any service or goods that you order, you should send a PO to the supplying vendor to kick off the purchasing process. In some cases, the PO might be a physical document, and in others, the PO might be digital.
Regardless of its format, the PO should include details like a line item description of what you’ve ordered, the date of the order, quantity, price, the date you need the order by (if applicable), etc. Please note that POs are different from invoices. POs will come into play in another stage of the accounts payable process.
2. Receiving Report
Next, when you finally get the goods or service you ordered, you should also get something called a receiving report or a goods receipt. Again, this document can be physical or digital, but it should include details such as: a list of everything you received, the quantity, shipping details like the delivery company, and the date you received the order.
This step is also where you can report issues like discrepancies in what you ordered versus what you received, issues in the shipping process, or any damages. This document, too, is part of another, later stage of the accounts payable process.
3. Vendor Invoice
Once a vendor fulfills your order, they’ll send along an invoice. This is the vendor’s official request for payment and, just like the other documents in this process, can be physical or digital in format. It should list things like the amount you owe to the vendor, sales taxes, shipping or freight fees, and a due date for payment.
After you receive the invoice, your accounts payable team will need to ensure it makes its way into your system. This can happen a couple of ways. One is for staff members to manually enter the information into the system. This method is time-consuming and leaves you susceptible to introducing errors in your system.
The second is to use a software that automates this step via optical character recognition (OCR) technology. Software that uses OCR is able to transform image files of invoices into computer-readable text files that easily transfer over to your ERP system, saving precious resources and eliminating the chance for human error to creep into your records.
Just like the previous documents, you’ll need the invoice later in the accounts payable process.
4. Three-way Match
Here’s where all of the previous documents we’ve mentioned—POs, receiving reports, and invoices—come back into play. One of the best ways to ensure the accuracy of your invoice payments, and to prevent potential fraud or financial loss, is to use a process called three way matching.
As the name suggests, three way matching involves comparing the information on the PO, the receiving report, and the invoice to make sure they match. Details like what you ordered, the quantity, and the price should be the same on these documents.
If there are any discrepancies, your accounts payable department and whoever placed the order will likely have to work together and with the vendor to rectify the issues. Once your team has handled those issues, or if there aren’t any discrepancies in the match, then the invoice is ready to move forward to the next step in the accounts payable process.
Please note the non-PO invoices, which are not based on a pre-approved purchase order, are not suitable for three-way matching. Processing these requires a more lucrative process and extra attention from the staff.
AP Process Infographic
Take a look at the infographic below covering the full AP process to see and then read on as we go into each step and what it entails.
5. Review, Approve, and Process Payments
Finally, there’s the invoice review and approval before your organization issues payment. This part of the process is relatively straightforward. However, hiccups can happen in the course of getting invoices approved, depending on the method your business uses.
Some teams still approve invoices manually. This means staffers must email invoices to whomever has the authority to issue invoice approvals and then wait for a response. Another popular method is to use software that automates the invoice routing process and allows for approval tiers: If the person who usually approves invoices is out of the office or is unable to approve within a certain amount of time, the software will reroute to a predetermined backup approver.
These systems can often automate payment, too, so once an invoice has the stamp of approval, the system will automatically generate a secure ACH payment to the vendor. Streamlining the process like this not only saves time, but it also helps ensure timely or even early payments that can save you money.
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Improve Your Accounts Payable Process
Clearly, the accounts payable process isn’t as straightforward as many people think. There are several steps that involve multiple parties and can require different types of checks and verification. So now that you have a good handle on how the accounts payable process works, what’s next?
If issues like tedious, manual invoice processing and approvals and late vendor payments plague your business, automating these processes will help eliminate them. MHC offers smart, easy-to-use tools to streamline the accounts payable process. With features like best-in-class OCR that supports straight-through invoice processing, automated approval routing, and automatic, secure ACH payments, your business will improve relationships with vendors, save money, and free up staff for more important tasks.
Discover how MHC NorthStar, our ap automation platform, can improve your accounts payable process! Request a personalized demo and see our solution in action today!
