Your accounts payable team might feel like they’re walking a tightrope between keeping a healthy cash flow and maintaining supplier relationships. Meeting both goals can be challenging, especially if the company relies on inefficient practices such as manual record-keeping and mailing checks.
While eliminating paper-based processes and applying some AP automation can help balance competing interests, there’s no doubt: AP teams are busy. In addition to paying for those goods and services, responsibilities may include managing travel and entertainment expenses and making loan payments. In many companies, AP handles all of a company’s short-term liabilities except payroll. The AP team’s complex mandate also involves close coordination with many business lines and functions—especially the purchasing department—as well as interactions with vendors.
After all, without raw materials, business grinds to a halt. So AP teams need to be at the top of their games.
The Cost of Accounts Payable Issues
Many accounts payable issues arise from outdated practices, such as paper-based invoice processing, writing checks and maintaining manual records or one-off spreadsheets. These practices can make it more difficult to control costs, analyze spending and preserve supplier relationships.
Although check writing for business-to-business transactions has been cut in half since 2004, according to the JPMorgan 2019 AFP Electronic Payments Survey, companies still make 42% of business customer payments by check. Checks are slower and costlier to process than electronic payments, and more prone to fraud.
Furthermore, research firm Ardent Partners estimates that half of invoices are still sent manually. The resulting errors and delays in processing can lead to payments that are either late, incorrect, duplicated or missed entirely.
Inefficient, paper-based AP is not only time-consuming, it can also throw off financial forecasting because it deprives the company of data on spending patterns to use for budgeting, scenario and supply chain planning and other analysis. Slow AP can erode supplier goodwill and cause vendors to shorten your payment terms, lower their delivery or service standards or otherwise downgrade the relationship.
8 Accounts Payable Challenges
Some of the biggest accounts payable challenges include:
Slow processing:
Paper-based, manual processes lead to lengthy approval timeframes while documents are shuffled between departments, and ultimately result in slower payments—especially if companies are still sending checks by mail. More than half of companies surveyed by Ardent Partners said that it takes too long to approve invoices and payments.
Falling behind in payments can kick off a chain reaction of ill-effects, like late-payment fees and delayed shipments of goods. Slow payments can also hurt your business’ credit rating, further reducing your ability to obtain favorable terms from suppliers and lenders.
Matching errors:
To ensure invoices are paid correctly, accounts payable departments generally perform three-way matching: checking that each invoice matches the purchase order and that the goods or services were actually received. Discrepancies occur frequently and are time-consuming to resolve. Data entry errors and missing or incorrect billing information are common culprits, as is the fact that relevant documents may have been produced in a variety of systems and formats.
Exception invoices and manual follow-up:
Accounts payable departments spend a lot of time dealing with exceptions, including incorrect, incomplete and nonmatching information in invoices. Research firm Aberdeen Group reports that up to 20% of invoices regularly contain incorrect or incomplete information, and Ardent says the average AP department spends nearly one quarter of its time handling supplier inquiries to resolve issues and track down missing information.
Unauthorized purchases:
Manual processes and inadequate controls can exacerbate the problem of unauthorized purchases. For example, AP may waste time investigating invoices for employee purchases made without an approved purchase order. Other unauthorized purchases involve inappropriate use of business credit cards, including using them to purchase items from unauthorized suppliers.
Fraud and theft:
Related, a typical organization loses 5% of its revenue to fraud every year, with a median loss of $125,000, according to the Association of Certified Fraud Examiners [ACFE]. Check fraud remains a major problem, but email scams are also common. In so-called business email compromise fraud, criminals impersonating executives or suppliers email authentic-looking invoices or other requests for payment. AP teams need to be constantly on guard for accounts payable fraud.
Paying invoices before a service or product is delivered:
Paying for goods promptly can earn your company supplier discounts. But busy AP staff may accidentally pay invoices when they arrive, without checking that the goods were actually delivered, in the expected condition. That can cause problems, especially if the shipment is found to have quality problems or fails to appear altogether. Paying bills before they're due also reduces the company’s liquidity, which can restrict cash flow.
Disappearing invoices:
It’s all too easy for invoices to disappear in a flurry of paperwork. Besides creating friction with suppliers, an unpaid invoice can cause accounting problems. The liability hits the balance sheet late, and the expense is missing from the current income statement, leaving management with inaccurate information about the company's financial position.
Double payment:
Duplicate payments can occur for a number of reasons, many of them related to manual data entry. Inconsistencies in manually entered supplier information, invoice amounts or coding can cause a single invoice to be paid twice. Companies may also accidentally make double payments if they use multiple financial applications instead of a single integrated system.
While duplicates may be less likely in small companies, where one person controls all payments, that’s not a scalable solution. To grow, you need automation and some best practices.
7 Accounts Payable Solutions
Going paperless:
Eliminating piles of paper invoices and manual data entry can drastically reduce processing time and error rates. Electronic invoices can be imported into accounting software, and optical character recognition can be used to scan and digitize the remaining paper invoices. Accounting software can then track invoices throughout the entire AP process.
Paying invoices electronically is also a good idea. It’s less expensive, easier to automate, and less error-prone than manually writing checks. Eliminating paper becomes even more important with the trend to remote working, because it’s easier for staff to collaborate and route invoices for approval.
Receiving invoices electronically doesn’t necessarily mean those invoices will be paid electronically. By the same token, paper invoices don’t have to be paid with paper checks. They can be paid electronically.
Stop relying on Excel spreadsheets:
Moving away from paper and manual data entry opens the door to more efficient, centralized accounts payable processes, but only if you eliminate spreadsheets as well. To increase your AP turnover ratio, a key performance indictor [KPI] that signals a company is paying its creditors and suppliers quickly, it helps to standardize the way invoices are processed from the time they’re received until theyy’re paid. Thaty’s hard to do with a folder of spreadsheets.
Besides increasing efficiency, professional accounting software can reduce the risk of disappearing invoices or duplicate payments and enable AP teams to generate reports that give business stakeholders better visibility into the frequency and timing of supplier payments, helping them negotiate better payment terms.
Streamline workflow:
Software can be used to codify efficient processes and workflows that automatically route invoices to the right people at each stage of the AP process. Every AP team should have a defined workflow that includes recording invoices, matching them with purchase orders and goods received, approving invoices and scheduling payments.
Three-way matching:
Software can help manage this crucial step in the AP workflow. Besides increasing accuracy, three-way matching actually reduces the effort required to process routine invoices by adding enough assurance that companies can be more comfortable with automated approvals.
Once purchase orders, receipts and invoices have been entered into the same system, the software can quickly determine whether they align and automatically approve matching invoices while flagging exceptions. AP staff can then schedule approved invoices for payment and spend their time dealing with the exceptions.
AP automation:
Ditching paper and applying software to streamline workflows are steps along the path to accounts payable automation, a broad term that encompasses the automation of routine steps such as receiving invoices, coding, routing for approval, payment and reconciliation. A fully automated process can eliminate the need to manually input data at any stage, although approvers may still need to sign off on payments with a mouse click. AP automation software typically also provides dashboards and analytic tools that help finance teams manage the AP process and diagnose problems. Data can also be analyzed for exceptions and other anomalies such as double payments, unauthorized purchases and fraud.
Systems integration:
A best practice is to integrate your AP automation system with your company’s ERP and customer relationship management, and other core business systems. This integration ensures that all systems work from the same data, facilitating the production of informative reports, such as cost/benefit analyses.
Early payment discounts:
Earning early payment discounts from suppliers can help to control costs. But AP and procurement departments need to balance the value of supplier discounts against the impact of early payments on cash flow. Companies with enough cash on hand can typically save 1% to 2% off the total bill by paying within 10 to 15 days. But making early payments can tie up cash that your company could put to better use elsewhere. AP automation can keep you from missing cut-off dates to receive negotiated discounts.