9 accounts payable best practices to optimize AP
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When you talk strategy with your business partners, how often do you bring up accounts payable?
Few businesses think AP needs their attention unless something’s going wrong, but this couldn’t be further from the truth. Accounts payable can significantly impact your financials, affecting not only your cash flow and bottom line, but also your reputation and opportunities in the market.
Fortunately, optimizing your accounts payable process isn’t complicated. With the right techniques and attention, your AP process can be a strategic tool to further your business goals.
Is accounts payable optimization worth it?
Before we dig into how to optimize your AP process, let’s talk about why it’ll be worth your time. Optimizing your AP process will:
- Increase efficiency: Implementing accounts payable best practices can reduce your AP processing workload, freeing your employees to focus on value-added tasks rather than compliance and manual data entry
- Reduce costs: AP best practices can help reduce your business’s cost per invoice. Better efficiency leads to cost savings on late fees, fraud containment costs, excess salaries, and more.
- Produce more accurate financials: When you perfect your AP process, your financials will be more accurate and up-to-date. And when you understand your cash position and have a more precise inventory count, you can make better financial decisions.
- Reduce fraud and cash mismanagement: Certain AP best practices can help prevent fraud and protect against losses resulting from negligence and cash mismanagement
- Improve vendor relationships: Adopting AP best practices will ensure your vendors get paid on time and in the correct amounts. When you prove you’re a reliable customer, your vendors and suppliers may be more likely to offer better payment terms, grant early payment discounts, or give you precedence over other companies.
- Reduce stress: With the right AP strategies, you and your employees will almost never have to stress about missed due dates or late payments. And because your vendors and suppliers are happy, you won’t have to worry about fraying those key relationships.
Accounts payable best practices
Optimizing your AP process is a big undertaking, so tackle it in chunks. Review the best practices below with your team and decide which one(s) to implement first. Prioritize the areas where you need the most help, then move on to the next one once you have the capacity. Even making one or two small changes can have a big impact on your organization.
1. Standardize your workflow
Create a workflow that describes exactly how you receive, approve, and process invoices. If you standardize your invoice workflow, you can look up the status of an order at any time. This ensures:
- All invoices are accounted for; no invoice is left behind
- Invoices are paid on time to the correct party—only once—in the correct amount
- Employees understand the workflow, preventing bottlenecks in the approval process
- There’s a record of how the invoice was managed
- Payments are recorded in your financial records
- You’ve taken advantage of early payment discounts and avoided late payment fees
2. Establish internal controls
Controls aren’t a thrilling topic, but keeping your invoicing system secure is necessary to safeguard against fraudulent activities. Internal controls for accounts payable can also provide better visibility into which employee—or which software—performed a task so you can trace errors and discrepancies to the source.
For example, your AP clerk, AP outsourcing provider, or automation software should perform a three-way match by matching the purchase order to the receiving report and the invoice.
3. Go paperless
Encourage your vendors and suppliers to ditch paper invoices; if they won’t, digitize them yourself. You can use optical character recognition (OCR) software to scan invoices, read them, and pull relevant numbers into your system. Not only does this create a more reliable invoice record, but it also makes that invoice searchable.
4. Integrate
Centralize your financial data by ensuring your invoice management software is integrated into your other systems. This could include your accounting software, enterprise resource planning (ERP) software, customer relationship management (CRM) software, project management software, and expense tracking software.
5. Automate
Manually entering invoices is time-consuming and can lead to costly errors. Automating your AP processes can ensure that the data in your system is accurate, reduce the chance of fraud, reduce the chance you’ll approve duplicate invoices, and help you avoid making duplicate payments or incorrect payments. A few AP automated solutions are:
- OCR for reading invoices, digitizing them, and extracting data from paper documents and PDFs
- Automated invoice approvals with 3-way matching
- Automated systems for procure-to-pay solutions
- Creating an audit trail
6. Build relationships with suppliers
If you haven’t already, create an open line of communication with your suppliers. Regular touches every now and then, even when you haven’t ordered in a while, can be a great way to build rapport. A good relationship puts you in a better position to negotiate early payment discounts or more flexible payment terms.
7. Understand your goals
Leverage your AP department to further your business goals. If your AP team understands your vision, they can help guide you there. You can start by isolating KPIs that depend on your AP department, like cost per invoice, AP turnover ratio, or days payable outstanding (DPO). Then, empower your employees to help improve those numbers.
8. Train employees
When you use automation software to handle backend accounting functions, you might be tempted to think you can lighten up on employee training. But you shouldn’t overlook ongoing training; you might just need to adjust your focus.
Instead of training your employees to perform AP functions, you may just need to train them to use your AP software properly. Either way, whether you use automation software or perform all functions manually, your employees need to understand your AP workflow and why each task is being performed.
9. Keep good records
Businesses run on data, so good recordkeeping is essential. Invoice processing software will keep records of who approved the purchase order, processed the invoice, approved payment, and recorded the AP journal entry. The best AP software can also build reports that help you make better strategic decisions surrounding AP.
How to monitor your AP process
Let’s say you’ve implemented many or all of the best practices we listed above. How will you know if your AP process is improving? You should review your AP data regularly. The right software makes this much easier, allowing you to pull up the following metrics at any time:
- Overall financial performance: With accurate financials, you can be sure your payables balance is manageable relative to your working capital
- Outstanding payments: This report will help you see what payments are about to hit your cash account and when
- Short-term cash needs: This report will tell you your cash needs over the next week, two weeks, month, etc.
- Forecast future cash needs: Based on historical data, your software can predict your future cash needs over the next year, adjusting for seasonality and predicted materials cost increases
- AP metrics and KPIs: Software can calculate useful financial metrics like DPO, overdue payables, AP turnover ratio, average invoice processing time, and others
- Aging reports for accounts payable: AP aging reports can help you prioritize payments if cash reserves are tight, showing you which invoices have been unpaid longest
- Supplier invoice analysis: This report can show the average number of invoices (and average invoice amounts) from each supplier
Aside from hard metrics, you can monitor your AP process by simply talking to your employees. How does your AP department feel about the changes? Do they find their jobs easier or less stressful after implementing these solutions?
AP optimization examples to follow
To better understand how businesses can optimize their AP workflow, let’s look at some success stories from two businesses that have implemented Ramp’s AP automation software:
FirstBlood: Simplifying AP and expense reimbursements
FirstBlood has employees worldwide and was becoming overwhelmed with employee reimbursement receipts. Ramp’s receipt management system made their AP and employee reimbursement processes much simpler.
Employees can now upload receipts automatically, and those reimbursements can be coded quickly and easily, tracking expenses to specific vendors. Ramp makes suggestions based on past transactions that the employees can quickly approve or change.
Implementing Ramp’s automation software helped employees get their reimbursements faster and made them more accurate. The AP department didn’t have to code each reimbursement request manually, and employees didn’t have to hold onto physical receipts once they had been uploaded.
Crossbeam: Saving money on vendor contracts
Crossbeam, a fast-growing technology company, implemented Ramp’s spend management software to help them reduce costs. Before Ramp, when it was time to procure new software, the Crossbeam team would spend hours researching vendors to find the best possible price.
Ramp’s spend management software has built-in pricing intelligence based on millions of financial transactions from other Ramp users. Crossbeam can now see at a glance whether their new quotes and existing SaaS contracts are reasonable, streamlining their vendor selection process and saving them hours of manual work.
Optimize your AP workflow with automation
Automating even just a portion of your AP process can reduce invoice processing delays, virtually eliminate human errors from manual data entry, and generate reports using the most up-to-date information.
Ramp’s accounts payable automation software streamlines the invoicing process by automating as much or as little of your AP workflow as you want, integrating seamlessly into your existing accounting systems. Get full, real-time visibility into your AP workflow, improving efficiency and helping you optimize cash flow.
Want to see what Ramp can do for your AP team? Check out our fully functional demo environment and see why our customers save an average of 5% a year.