How to create the ideal accounts payable process

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How do companies manage to pay their bills accurately and on time? It's all thanks to the Accounts Payable (AP) approval process. This behind-the-scenes system is crucial for keeping the financial gears turning smoothly within any organization. But here's the catch: despite its importance, this process often gets bogged down by inefficiencies and snags, causing delays and frustration for everyone involved. 

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In this article, we’re diving deep into the world of AP approval. We'll uncover why it is so important, the common hurdles it faces, and most importantly, how modern solutions can untangle the mess and make the whole process a breeze.

What is the accounts payable approval process?

The AP approval process refers to the series of steps undertaken by the AP team to validate and authorize supplier invoices for payment. This process starts with the receipt of the invoice from the vendor and concludes once the vendor invoices are paid. Stages of the AP process:

• Invoice receipt: Upon delivery of goods and services as specified in the purchase order (PO), the buyer generates a goods receipt note (GRN). Subsequently, the supplier prepares the invoice, detailing the quantity, unit cost, total cost, and delivery specifics. The invoices are then sent to the accounts team.

• Invoice verified with 3-way match: Upon invoice reception, its details are cross-checked against the PO and GRN. This step ensures payment only for received goods/services as per the PO, mitigating errors and discrepancies. Though crucial, this matching process is labor-intensive and time-consuming, often requiring extensive manual effort from accounts teams.

• Invoice review: Invoices passing the 3-way matching undergo data verification, typically overseen by the accounts manager. Further validation may involve consultation with the procurement manager. Once approved, the invoices proceed to the payment team. Rejected invoices are returned to the supplier for rectification. This review confirms accurate charging, making sure clients are billed only for received benefits.

• Invoice integration into the accounting system: Approved invoices are integrated into the accounting system, establishing an audit trail for payment tracking.

• Vendor payment: The finalized, approved invoices progress to payment processing, marking the culmination of the AP approval process.

Best practices to optimize invoice processing

To maintain efficiency in the AP department, it is crucial to adopt the best practices for invoice processing. Here's a concise rundown:

• Establish and use internal controls: Irrespective of your business's size or experience in handling bills, creating robust internal controls for invoice processing and payment is paramount. These controls should include: 

• Setting up system access control levels for all employees: Limiting access to financial systems mitigates the risk of fraud in AP. Grant employees’ access only to the functions necessary for their roles.
• Implementing segregation of duties: Allocating different responsibilities within the AP process to separate employees is crucial. For instance, ensure that the individual approving an invoice is distinct from the one performing the three-way match or authorizing payments. Even in small businesses with limited resources, segregating AP tasks is essential to prevent a single person from being solely responsible for crucial tasks.

• Reconcile bank accounts: Regularly reconciling bank accounts is essential for detecting discrepancies and potential fraud. Even in the case of predominantly electronic payments, maintaining reconciled bank accounts helps identify unauthorized charges and ensures financial accuracy.
• Prioritize the payment of invoices: Strategic prioritization of payments enables businesses to capitalize on available discounts and effectively manage cash flow. Prioritize payments to optimize discount opportunities while ensuring timely settlements for invoices with longer payment terms.
• Always verify for duplicate payments: Manual invoice and payment processing can lead to the inadvertent issuance of duplicate payments. Thoroughly reviewing invoices, particularly those with identical amounts, mitigates the risk of overpayments. This practice is crucial before making payments, as rectifying overpayments with vendors can be challenging.
• Transitioning to an automated workflow: Embracing automation streamlines the invoice processing workflow, enhancing accuracy, efficiency, and overall control. Consider transitioning to automated systems to optimize operations and minimize manual errors.

How much time does invoice approval take?

The duration of the approval cycle varies based on the presence or absence of automation. In some instances, approval cycles can last up to 10 days if the manager involved is unavailable.

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Moreover, the efficiency of the process hinges on whether it is manual or automated. With automation, approval may not be necessary for invoices satisfying 3-way match criteria.

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For clients using automation, Ramp has achieved approval cycle times of less than 2 hours in most cases. 

Manual accounts payable approval process

Managing the AP approval process manually presents significant challenges for the AP team. As per findings from Payables Friction Index survey, nearly 44% of companies report that they continue to receive invoices via fax. 

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Not only does it entail considerable effort to track and organize invoices, but manual processing also incurs additional costs. Moreover, the prevalence of errors and inaccuracies tends to be higher in manual workflows.  

Exploring common challenges with manual accounts payable approval workflows

Navigating invoice processing comes with its fair share of hurdles for AP departments. Here are some of the most prevalent challenges:

• Data entry errors: Manual data entry increases the risk of human errors. Even seemingly minor mistakes, like entering an incorrect invoice number or missing digits in an amount due, can lead to costly consequences such as duplicate payments or overpayments that are challenging to rectify.

• Delays in invoice approval: Inefficient approval processes can lead to prolonged delays, with invoices languishing on approvers' desks for days or even weeks. The lack of backup approvers and the potential for invoices to go missing exacerbate these bottlenecks, hampering timely payments.
• Inaccurate reporting: Delayed approvals skew financial reporting, resulting in inaccuracies such as understated payables, inflated net profit figures, and misrepresentation of cash flow. The longer invoices remain unprocessed, the greater the distortion in financial records.
• Missed discounts: Lengthy approval cycles often cause businesses to miss out on valuable discounts offered for prompt payment. While individual discounts may seem negligible, their cumulative impact can significantly affect the bottom line over time.

Overcoming these challenges requires streamlined processes, efficient approval workflows, and leveraging automation to enhance accuracy and timeliness in invoice processing. By addressing these pain points, AP departments can optimize operations and maximize financial efficiency.

Difference between manual and automation approval workflow

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Gartner forecasts that the spend on the AP invoice automation (APIA) and supplier e-invoicing software markets will be nearly $1.75 billion through 2026, up from approximately $925 million in 2021, at a compound annual growth rate (CAGR) of 14%.

Difference between authorization and approval 

Authorization: Authorization refers to the delegation of authority, which can be either general or specific. General authorization might involve granting a department the authority to spend funds from an approved budget. On the other hand, specific authorization is about approving individual transactions, usually through signatures or electronic approvals. 

Approval: When a transaction needs approval, it means someone has reviewed all the supporting documents and confirmed that the transaction is correct, appropriate, and follows all relevant rules and regulations. 

• This involves scrutinizing the paperwork, asking questions if something seems off, and making sure all the necessary information is there to justify the transaction. 
• Signing blank forms should never be allowed under any circumstances. 

Levels of approval

Approval levels often depend on the amount of money involved. If a transaction exceeds a certain threshold, it needs approval from someone higher up the chain. It is customary for departments to delineate these approval tiers in their policies and procedures manual or an accountability matrix.

• Guidance for approvers: Those responsible for approving transactions need to be extra careful. Approvers should never instruct others to sign their name on their behalf. If the approver is using electronic approvals, they should keep their passwords to themselves. 

• Maintaining the segregation of duties is paramount: the individual initiating a transaction should never be the same person who approves it.

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By understanding these processes and following these guidelines, organizations can ensure their financial operations run smoothly and remain compliant with all the necessary regulations.

How to automate the invoice approval workflow

• Centralize mail or documents for smoother routing: Establishing a centralized system, such as a shared email inbox or document repository, ensures all incoming invoices are directed to a single location. This simplifies the routing process and ensures invoices reach the appropriate approver efficiently. 
• Ensure vendors provide complete invoice details: Implement strict guidelines for vendors to include all necessary details on their invoices, such as invoice number, purchase order number, date of purchase, item description, quantity, and payment terms. Complete information reduces the likelihood of delays or the need for follow-up queries.
• Automate matching invoices with purchase orders for accuracy: Utilize automated systems to match incoming invoices with corresponding purchase orders and receipts. This automated matching process verifies the accuracy of the invoice details, reduces the risk of duplicate payments, and streamlines the payment approval process.
• Appoint approvers at each stage to avoid delays: Establish a multi-level approval process where invoices progress through various stages of approval before final payment. Assigning appropriate individuals or departments as approvers ensures thorough review and prevents bottlenecks or delays in the approval workflow.
• Use automated reminders for timely action: Implement automated reminder notifications to prompt assigned approvers to act on pending invoices. These reminders ensure that invoices are reviewed and approved promptly, minimizing the risk of late payments and maintaining positive vendor relationships.

• Track KPIs like invoice cycle time and processing costs for insights: Monitor key performance indicators (KPIs) such as invoice cycle time (from receipt to payment), total processing costs, and other relevant metrics. Tracking these KPIs provides valuable insights into the efficiency and effectiveness of the invoice approval process, enabling continuous improvement and optimization efforts.

Gateway to financial success 

Managing the AP approval process can take up a lot of time. It involves a lot of manual work and mistakes can easily happen. But if businesses take the time to learn about how it works and the advantages of using automation, they can save a lot of time and money in the long run. 

Build the ideal accounts payable approval process with Ramp

Ramp’s accounts payable software automates your entire accounts payable workflow so every bill is recorded, approved, and paid without any data entry or repetitive tasks.

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Minimize the risk of fraud and payment errors. Ramp’s AP platform identifies duplicate invoices, routes approvals for you, and 2-way matches to purchase orders.