10 Best Practices to Optimize Your Accounts Payable Department

Accounts Payable is an essential part of running a successful business. It involves the processing and paying of all invoices, bills, and other expenses that keep your business operations running smoothly. Poorly managed accounts payable can lead to missed payments or late payment fees, which ultimately damage relationships with vendors and hurt your cash flow.

The following are 10 best practices for optimizing accounts payable processes so you can save time and money while also improving your firm's cash management, solidifying crucial vendor relationships, and strengthening your security protections. We will also discuss how automation can further enhance the efficiency of your accounts payable processes and enable you to better manage your working capital. So let’s get started!

1. Adopt a digital, automated solution

There is ample data that shows how paper invoices and manual AP processes are expensive, time-consuming, and susceptible to human errors. This is because traditional AP workflows require AP staff to sort, code, and file invoices by hand, which creates ample opportunities for documents to get lost or duplicated amidst a sea of growing paperwork.

Automating your AP process with an AP automation tool takes this burden off the shoulders of your AP staff by centralizing invoice management and payment authorizations onto a single platform, thereby speeding up the approval and payment process and eliminating errors and redundancies. This digitization allows team members to focus on more strategic projects for the back office instead of spending the majority of their time on tedious, repetitive tasks.

Our team of finance experts recommends considering the following factors when selecting an AP automation tool:

  • Features: The selected AP automation tool should have features that align with your organization's specific needs. For example, if your company also struggles with collections, an integrated solution like Centime that includes AR functionality can be a great way to get line-of-sight across all cash inflows and outflows.
  • Integration: The AP automation tool should be compatible with your existing accounting software or ERP system. A seamless integration between these systems is crucial, or else you run the risk of simply creating more bottlenecks and headaches in your AP workflow.
  • Security: The tool should provide robust security features to protect sensitive financial information, such as two-factor authentication and access controls.
  • Scalability: The tool should be able to handle an increasing volume of invoices and payments without compromising performance or accuracy.
  • Usability: The AP automation tool should be user-friendly and intuitive, minimizing the need for extensive training.
  • Customer Support: The tool should have a responsive and knowledgeable customer support team to quickly and effectively resolve any issues that arise.

By considering these factors, finance teams can select an AP automation tool that aligns with their specific needs and provides the necessary features to optimize their AP process, improve efficiencies, and ultimately reduce costs.

2. Organize and prioritize invoices

Managing cash flow involves keeping track of all the invoices that need to be paid and their respective due dates. This can vary depending on the size of your business and the number of invoices you receive. Teams who don't prioritize and organize their invoices are prone to more late payments, which negatively impacts both supplier relationships and their bottom line.

As of last year, nearly half of all business invoices in the US were late. The costs of these delays and errors have prompted many businesses to purchase digital solutions, like AP automation tools, to fix them. Your team should look into a digital tool to streamline your invoice management process if:

  • your team wants to minimize duplicate payments, late payments fees, and human errors throughout your AP workflow
  • your team wants more visibility across its AP processes
  • your team cannot process your current monthly invoice volume
  • you have difficulty managing seasonal invoice volume spikes
  • your business is quickly growing and anticipates needing more AP headcount in the next 6 months

The AP rule of thumb is to pay invoices in order of due date and payment terms, but it can be difficult to ensure timely and accurate payments without a proper invoice management process. Some AP automation tools can set up automatic alerts to remind your team when invoices are due and prioritize which ones should be paid first so that your team never misses a payment. This also helps your bottom line by adding more visibility to early payment discount opportunities from suppliers.

On the other hand, you may want to wait and pay suppliers closer to the payment due date to keep more cash on hand. In this case, make sure to select an AP automation tool that also offers cash management capabilities to help you forecast and manage your short-term cash flow.

3. Strengthen supplier relationships

Improving communication with your suppliers is key to ensuring a successful accounts payable process. Poor communication or inaccurate payment information can lead to late payments, dispute resolution delays, and in worst-case scenarios, ultimately threaten strategic supplier relationships. This is especially detrimental in industries like healthcare where there is a smaller pool of suppliers that provide vertical-specific tools and supplies.

The two best ways to ensure strong supplier relationships are to pay your vendors on time and proactively communicate with them throughout the entire payment process. Make sure your team has access to all the necessary information, such as invoices, purchase orders, and bank account details.

An AP automation tool simplifies this process by eliminating the need for manual entry of invoice data, providing real-time visibility into payment statuses, and reducing errors due to human input. This allows you to provide accurate information about payments to suppliers and quickly respond to their inquiries without requiring extra effort from AP personnel. Select AP automation tools can even automate remittance communications, so that vendors are always kept informed when one of their payments is scheduled.

4. Use KPIs to measure your AP team's efficiency

You can’t measure your progress without first knowing where you stand. Make sure to measure KPIs before adopting any of the AP best practices listed in this blog. Many metrics can be used to assess the performance of an AP team, but we recommend these to start:

  • Cost per invoice
  • Payment accuracy rate
  • Days Payable Outstanding (DPO)
  • Number of invoices paid on time
  • Early payment discount capture rate
  • Amount of time spent handling supplier disputes

After implementing an AP automation solution and other best practices from this list, it's now time to measure how your department's performance has changed. Set up specific goals and KPIs to keep your team accountable for growth and improvement over time. Teams without AP automation should still take the time to track KPIs, albeit a more time-intensive process.

5. Establish fraud detection methods

A recent shift to hybrid and remote work has opened new opportunities for fraudsters to infiltrate sensitive information from finance teams. As such, fraud remains a top concern amongst AP staff. Fraud can come from several sources: cybercriminals, suppliers, even your employees.

Cybercriminals have a wide array of methods to gain access to your organization's information, but accounts payable automation tools can help combat this challenge with a more rigorous approval tracking system and a clear audit trail.

AP teams can decrease their risk of fraud by utilizing digital payment methods such as ACH or credit card, which are more secure than using checks and provide more robust security features. By leveraging digital payments, teams can also benefit from enhanced tracking capabilities to decrease their risk of fraud and make it easier to catch suspicious payments.

6. Create safeguards to catch duplicate payments

Duplicate invoices often occur when a supplier originally sends an invoice by mail and then emails the same invoice as a follow-up to ensure their customer received it. Teams with manual systems, especially those with high invoice volumes, are less likely to realize the duplicate and often end up routing both invoices for payment.

25% of AP professionals say duplicate invoices and payments are major pain points. Similar to combatting fraud, digitizing and automating manual processes is the best way to minimize duplicate invoices. You can minimize duplicate invoices and save your AP team both time and money by partnering with a payables system that automatically alerts your AP team when it suspects a duplicate invoice has been entered into the system. This will reduce leaks in your cash flow and keep your books organized.

“Many businesses may think their AP processes — although not perfect — are working fine. This way of thinking can cost the business thousands, if not millions, of dollars annually.”

-David Disque, President at CSI

7. Establish access controls

Access controls are an important component of both manual and automated accounts payable processes. Manual processes, in particular, require robust access control measures to ensure the safety and security of sensitive financial information. Without access control measures such as user authentication and authorization, it becomes much easier for unauthorized users to access confidential information or make erroneous payments.

AP automation tools strengthen the security controls of finance teams by automatically separating duties within the AP workflow. With system-level controls in place, these tools help identify and eliminate structural inefficiencies that otherwise limit teams' abilities to detect security breaches and fraud attempts. The automation of AP tasks also limits the need for multiple human interactions, reducing the number of people involved in the process, and thereby minimizing the risk of human errors and malicious activities. This not only improves overall AP efficiency but also ensures that proper checks and balances are in place to provide a more secure financial environment for the business.

Here are some internal controls that we recommend:

  • Segregation of duties: AP needs to ensure that different people handle different parts of the AP process to prevent any single person from being able to carry out a fraudulent or erroneous transaction.
  • Role-based access control: Similar to point one, teams with an AP automation solution should ensure their tool enables role-based access controls, which make it so that each user can access only the features that are necessary for their specific job functions.
  • Password policies: Teams should implement strong password policies to ensure that passwords are unique, complex, and frequently changed.
  • Audit trails: AP teams should adopt systems that enable visibility to track all activities within their AP system so that leaders can detect and investigate any suspicious activity. This visibility is also important for providing audit trails.
  • Two-factor authentication: We recommend that teams consider implementing two-factor authentication (2FA) for users accessing the AP system remotely. This provides an added layer of security against fraudsters.

By establishing these internal controls, you can create a secure AP environment so that only authorized personnel have access to your sensitive financial information.

8. Standardize payment terms as much as possible

When you work to standardize payment terms, you free up working capital, gain greater control over cash flow, and optimize payment processing. This is especially important when dealing with a high number of suppliers, each of whom wishes to negotiate their payment terms. Standardizing terms helps to make your workflow more efficient. It also prevents ad hoc negotiations with individual suppliers that can negatively impact your DPO, affecting the payable department’s bottom line.

However, instituting standard payment terms shouldn’t preclude renegotiations. Your team should do its research and ensure that your supplier is offering the same or better terms than it offers similar businesses. If you are operating at a disadvantage, then it is time to renegotiate. Although invoices generally come in on a 30-, 60-, or 90-day cycle, you may find that taking advantage of early payment discounts outweighs the benefits of an extended DPO.

You should also consider payment methods when negotiating your payment terms with suppliers. Reducing the number of paper checks your team cuts and mails will reduce AP costs and late payments due to delivery issues. Instead, consider centralizing and managing 100% of your vendor payments electronically via a variety of payment methods, including ACH, wire, or virtual card. These methods are not only quicker, but they also increase visibility into payment status and strengthen security against fraud.

9. Track and resolve disputes

Payment disputes can lead to delayed payments, damaged supplier relationships, increased resource requirements, and inaccurate financial reporting, all of which significantly impact the efficiency and effectiveness of AP teams. Disputes can arise due to a variety of reasons, such as billing errors, incorrect pricing, or quality issues. Resolving these issues quickly is essential to maintaining a necessary cash flow.

By tracking and promptly resolving disputes, AP teams can prevent payment delays and pay vendors accurately and on time. This, in turn, improves supplier relationships. Additionally, an efficient dispute resolution process can help quickly identify recurring issues and enable better communication with vendors, leading to better collaboration and closer working partnerships over time.

It's important to track and resolve disputes with suppliers to keep strong vendor relationships, ensure correct payments, and improve the quality of goods and services you receive. Paying on time helps maintain healthy business relationships while keeping track of disputes can help identify problematic suppliers so your team can find alternatives. By reducing time spent on vendor communication, employees can focus on other projects for your back office.

10. Maintain updated supplier information

Keeping accurate and updated supplier records enables AP teams to make timely and accurate payments, prevent payment errors, and maintain strong supplier relationships. Failing to update details like changes in the vendor's bank details or contact information can lead to delayed payments or even non-payment, which can damage supplier relationships and impact future business transactions.

Keeping supplier information accurate and up-to-date is essential for efficient and effective AP operations, strong supplier relationships, compliance with regulations, and accurate financial reporting.

Achieve Long Lasting Success

It's no longer enough to simply pay bills on time; AP must be viewed as a strategic function that contributes to the overall financial prosperity of your organization. From automating invoice processing to implementing secure payment systems, the right AP best practices can make all the difference in achieving your financial goals in 2023 and beyond. By adopting these top 10 practices and optimizing your AP processes, you can streamline operations, reduce costs, and mitigate risk.

Centime offers automated AP, AR, and cash flow forecasting tools, plus lines of credit, and banking solutions to streamline manual finance processes, manage short-term cash flow, and break up the silos that have long hindered traditional finance teams.

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