If you were to suggest to members of your organization that Accounts Payable (AP) is one of the most critical functions in your company, they may look at you in disbelief. But it is an often underappreciated fact that Accounts Payable (AP) is one of the most critical functions within a company. And it is especially critical within the finance and accounting department. If implemented poorly, AP can be one of the greatest sources of risk, waste, and cost in an organization.
On the other hand, with proper investment and appropriate management and oversight, the Accounts Payable function can become one of the Chief Financial Officer’s (CFO’s) top performers, rather than the risk factor that it has traditionally been for many enterprises.
In this article, we’ll explain what Accounts Payable involves, and look at the challenges and risks associated with it. We shall also consider the options available for AP implementation – and how proper execution can turn Accounts Payable into a profit center for your organization.
What Is Accounts Payable?
AP timeframes may be monthly, quarterly, or yearly, depending on how often outstanding payments are recorded on the company’s balance sheet. Note, however, that from a financial reporting perspective, any increase or decrease in an organization’s total Accounts Payable figure over the same period will appear on the company’s cash flow statement, rather than the balance sheet.
The Accounts Payable Process
The Accounts Payable process typically consists of five steps:
- Invoice capture: The organization receives an invoice from a supplier or vendor and extracts the invoice data for processing.
- Invoice approval: The accounting team verifies with the relevant department or individual buyer that goods or services have been received and that the invoice is accurate.
- Error checking and resolution: The buyer must root out the source of any variances or mistakes in the invoice and rectify them before sending an updated invoice to the Accounts Payable team.
- Authorizing payment: Once error checking is complete and the corrected invoice has been approved, the AP team gets authorization to set up and make the required payment.
- Making payment: Payment occurs, and a notification is sent to the vendor or supplier – at which point, the invoice is marked as “paid.”
Accounts Payable departments also provide reporting, support for inquiries from internal and external parties such as buyers and suppliers, and assistance with resolving processing issues.
Examples of Accounts Payable
There are a broad variety of procured items that fall under the “Accounts Payable” banner. These include the purchase of raw materials required for production, or finished goods needed for the running of a business. So too do any services provided by subcontractors, such as maintenance or repair work that needs to be compensated for.
Items leased for the business, such as equipment, vehicles, or office space also count as Accounts Payable. Debts for transportation, logistics, or freight fall under Accounts Payable as well, as these services are provided by a third party.
Technology assets such as software licenses may also be classified as Accounts Payable items.
Why Accounts Payable Matters
If you want to grow your business, it is likely that you will want to leverage the ability to buy goods or services on credit. Simply put, when the bills become due, if vendors and suppliers are not paid properly and on time, a business stops working. An organization that makes timely and secure payments to suppliers and vendors benefits from an enhanced reputation as a reliable customer and partner. A good reputation and credit rating also allows your business to obtain critical items on extended terms. The Accounts Payable (AP) team is therefore responsible for maintaining a positive cash flow, and for nurturing strong and lasting supplier relationships.
Although the settlement of outstanding debts is central to the AP function, Accounts Payable can also generate real value for the organization by providing accurate financial data and insights on spend that fuel business forecasting and decision-making.
Challenges and Risks of AP
The Accounts Payable function requires close internal controls and processes to avoid overpayments or the settling of inaccurate invoices. AP procedures at smaller firms are usually handled by one or a few people, while medium and larger-scale organizations typically need to employ a dedicated AP department. However, regardless of firm size, it is becoming harder for organizations to find people with the right clerical skills to do this kind of work well. For the select few interested and qualified candidates found, salaries have gone up significantly in the last decade, adding to labor costs.
Accounts Payable is also inherently expensive – especially when conducted in-house. Not every company can afford to invest in the latest high-powered AP automation tools, necessitating more employee effort. For example, the average company spends somewhere between $5 and $10 to process a single invoice, not including disbursement.
Given its effect on the financial standing of a company, it is important to manage the Accounts Payable liability effectively and responsibly to ensure and maintain your credibility in paying debts. However, AP has significant control issues, and is usually the largest area for fraud and cybercrime in a company. It is also often the single largest component in an external audit.
Delving deeper into the challenges and risks associated with Accounts Payable, the following key areas are of critical note.
Fraud, Theft and Cybercrime
Accounts Payable fraud may occur internally through the action of employees, or externally by vendors and other third parties looking to gain access to a company’s AP systems. Examples include check fraud and billing schemes where an employee produces a false invoice that makes it appear that it is from a valid supplier.
Dependency on an Internal Team
AP Skills Shortage
Errors in the AP Process
Accounts Payable Implementation Options
Given the risks and challenges involved in AP, organizations often look to either of two alternatives for Accounts Payable solutions – automation or outsourcing. Recent research from PYMNTS.COM indicates that two-thirds of firms are either currently innovating their systems to automate their AP processes or plan to do so within 12 months.
Both solutions accelerate the process of routing invoices electronically when compared to the time it takes to route pieces of paper. Both options also provide real-time visibility into the status of any invoices.
In terms of cost, however, AP automation software will not save money unless your company has a very high volume of invoices (typically 50,000 invoices per month or more). This is because adding to the costs for departmental resources overseeing the process and troubleshooting exceptions, the cost of setup and management of the software outweighs any other cost savings. In contrast, AP outsourcing typically saves anywhere from 40% to 80% versus current costs.
Outsourcing your Accounts Payable also provides other benefits.
Benefits of Outsourcing AP
Accounts Payable outsourcing companies bring expertise, technology, and best practices that most companies cannot get in-house unless they are very large (generally with over $2 billion in revenue). Companies that provide AP outsourcing must invest in quality resources and the most advanced automation technologies to be able to provide consistently accurate and reliable AP processing services. Otherwise, they will not be able to retain clientele or demonstrate premier capabilities to new customers.
Professional AP outsourcing services also provide greater transparency on invoice status, and achieve much higher levels of quality, internal, and management controls due to their sophisticated processes and automation.
Accounts Payable outsourcing companies usually process invoices more quickly, supporting more timely and useful business information on liabilities, and the ability to take advantage of discounts.
As a result, this means that your company has greater control over AP – putting the lie to the widely held assumption that outsourcing reduces control.
Accounts Payable outsourcing providers offer comprehensive solutions that include low-cost disbursements. The best AP outsourcers provide advanced payment processing capabilities including supplier enrollment for payment through virtual credit card or enhanced ACH debits. These generate rebate revenues, allowing the AP department to become a profit center.
Here at IQ BackOffice, we provide financial business process outsourcing for large and mid-sized enterprises. We serve a range of diverse industries, including manufacturing and distribution, healthcare and dental, restaurant and hospitality, energy, retail, and technology. Our solutions enable companies around the globe to automate and streamline the complex financial processes they manage.
IQ BackOffice reengineers financial processes to take advantage of best practices and leverage state-of-the-art automation. This allows us to remove manual or inefficient steps, deliver improved controls and up to 70% cost savings for our clients.
To find out more about how IQ BackOffice can reduce costs and streamline your Accounts Payable function, get in touch with us.
AP Outsourcing - FAQs
Accounts Payable (AP) describes any amount of money that an organization owes to suppliers or vendors for products or services purchased on credit.
If you want to grow your business, it is likely that you will want to leverage the ability to buy goods or services on credit. Simply put, when the bills become due, if vendors and suppliers are not paid properly and on time, a business stops working.