A company’s Accounts Payable (AP) department carries the very important responsibility of tracing what the business owes to suppliers and vendors and verifying that payments are approved and made to these counterparties. Without an AP department, a business would have a difficult time tracking down all the invoices it receives from its suppliers and ensuring these obligations are met. These short-term liabilities the company has are the accounts payable and are an important obligation the enterprise must attend to.
What Is Accounts Payable?
An accounts payable is simply a current debt a business owes to a vendor or supplier. Generally speaking, an accounts payable needs to be paid by the AP department in about 30 days. The total amount of accounts payable appears on the company’s balance sheet in the section for current liabilities.
An accounts payable represents an amount owed; it is not a transaction that has already been paid in cash. It is money owed for a purchase the company has made on credit.
An accounts payable is not an invoice. The invoice is a paper or digital document that charges the business for the purchase of goods or services it has made. The accounts payable is the amount owed. An accounts payable is also not an accounts receivable, which is an amount that is owed to a business for its goods or services it has sold to other businesses on credit terms.
What Is an Accounts Payable Department?
Because an accounts payable is so important to the success and health of a business, most companies will have a dedicated AP department. The primary task of the accounts payable team is to ensure that all debts incurred by the enterprise are properly recorded and paid.
If this accounts payable function is not fulfilled by the AP department, suppliers and vendors will not be paid. In this situation, bad relations will ensue between the business and its suppliers, which could affect the business’s ability to procure needed goods and services in the future.
Besides making sure that everyone gets paid on time, AP departments are also tasked with ensuring that no accounting mistakes are made. It must keep an eye out for fraud, try to avoid mistakes, and reconcile any discrepancies found.
Another accounts payable function AP departments have is to obtain discounts for early payments on invoices. Many suppliers offer such discounts when payments are made before the due date on an invoice, so the accounts payable department can help to reduce overhead in a business, which is, of course, an ongoing concern for any enterprise.
Roles Within an AP Department
There are many account payable department responsibilities, and these duties are divided among multiple employees within the payable department. A small business may only have an Accounts Payable Clerk. A larger operation may have the following workers within its accounts payable department:
- Accounts Payable Coordinator
- Invoice to Pay Manager
- Accounts Payable Manager
- Accounts Payable Specialist
- Accounting Assistant
A very large company could also have an Accounts Payable Officer who is in charge of the entire AP department. The exact duties assigned to each role within an accounts payable department will vary by company and the size of the operation.
Workflow in AP Departments
In every AP department, there is a workflow that describes the start-to-finish journey of procuring services and goods and then processing the invoices associated with such purchases and making sure everyone gets paid on time. This step-by-step procedure could be either digital or manual, with the digital format offering the easier and less time-consuming method. In either case, the workflow for an accounts payable team will generally track the following outline:
#1) Capture the invoice. The invoice, whether physical or electronic, needs to be entered into the enterprise resource planning (ERP) software program. As already mentioned, this could be done by a human or digital worker.
#2) Approval. After the invoice has been properly cataloged, it must be approved. Again, this step could either be manual or automated.
#3) Payment permission. Payment for the invoice must be authorized at this point. It is the responsibility of the accounts payable department to obtain this permission from the appropriate party within the business.
#4) Transmission. After the payment has been authorized, it needs to be sent and verified. Although physical payment methods such as check or cash could still be used in some cases, digital payments are gaining in popularity, especially those that can integrate with AP software.
It’s important for the payable department to closely monitor the end-to-end workflow process. If this accounts payable function is not performed correctly, mistakes can emerge, which will put more strain on the AP team.
Functions of AP Departments
There are several important accounts payable department responsibilities that AP teams must be diligent in executing. Generally speaking, they tend to fall into one of the following categories:
#1) Reconcile financial statements. AP departments must prevent bogus charges and correct any disparities to show up in bank statements or other financial documents.
#2) Solve problems with invoice data. The accounts payable team must identify any inconsistencies in the data that appears on an invoice and quickly correct the information.
#3) Process invoices. The invoices a business receives from its suppliers must be processed by the accounts payable department so that they can be paid in a timely fashion.
#4) Invoice payments. An important accounts payable function is to make payment on an invoice.
#5) In-house payments. Besides paying invoices, a payable department must also manage internal payments for things like office supplies and postage costs.
#6) Store invoices and match them. Invoices must be matched with their purchase orders. They also must be stored physically or electronically, the latter method delivering the most efficient method for research and retrieval.
#7) Preserve good relations with vendors. Keeping the vendor-business relationship going is an important task of AP departments. When invoices are paid on time, and information is quickly clarified and stored, future transactions are more likely to be trouble-free.
Organizing the Accounts Payable Team
The better organized a payable department is, the more valuable it will be to the business. With proper organization, the workflow will be more efficient, too. Here are some tips to structure an AP department in the most resourceful way:
#1) Document everything. Make sure every purchase by the company has a purchase order (PO) so that a record can be created. A log of tax ID numbers should be kept as well.
#2) Store records for easy retrieval. Documents with date stamps should be kept in one location that’s easily accessible.
#3) Double check. Have different AP team members double check each other to prevent fraud and mistakes.
#4) Reconcile accounts regularly. Preferably on a daily basis, verify that invoices match POs. Keep a register of any discrepancies and their resolutions.
#5) Use digital payments. Today’s electronic forms of payment, including the Automated Clearing House (ACH), are efficient and easy. Often, they cost no more than paper payments and are easier to keep track of.
#6) Automate the AP team. Besides payments, many accounts payable functions can be digitized. Doing so has many advantages, including the avoidance of data-entry errors.
How Automation Can Benefit AP Departments
Accounts payable teams that upgrade to today’s latest software will reap myriad benefits. The older, manual paper-based way of performing accounts payable functions is time-consuming and labor-intensive. AP departments that switch to full automation with advanced software will be able to process invoices faster with fewer mistakes and inaccuracies. And because today’s best AP programs come with Artificial Intelligence (AI), little human input is needed for many tasks.
For example, today’s advanced AP software is able to read emails, scan invoices, and automatically capture important details from these documents. Real-time notifications can be sent out to AP team members when more attention is necessary. Because this system functions on autopilot, less human effort from employees is required.
AP software can also incorporate rules for workflow. For instance, an invoice can be routed by a program to the correct department for approval. Payment controls can be incorporated for paying invoices, and these controls can be edited by various factors, such as payment amount. A payment can automatically be debited from the company’s bank account. The AI performs these tasks all by itself. And with machine learning, the AI can learn from experience.
Everything the program does is recorded in a ledger, and this record can be inspected at will. Once again, because this audit trail is created automatically by a software program, less human labor is required.
Software designed for AP departments can also integrate with other digital accounting tools, creating a holistic fully-electronic accounting system that makes accounts payable functions easier and less time-consuming for employees.
Any business that wants to succeed needs a productive AP department with the right equipment. Accounts payable departments that rely on outdated paper-based technology run the risk of getting left behind by their competitors. Today’s sophisticated digital tools provide many benefits to payable departments, not least of which is less human effort and faster processing times.