What is accounts payable (AP)? Definition, process, and examples
- What is accounts payable (AP)?
- How to process accounts payable
- How to calculate AP turnover ratio
- AP workflow best practices
- Benefits of AP automation
- How to transition from manual to automated AP
- Overcoming AP challenges: Solutions for AP teams
- Streamline AP with Ramp Bill Pay
Accounts payable (AP) is the money your business owes to vendors or suppliers for goods and services purchased on credit, typically due within 30 to 90 days. Effective AP management helps maintain healthy cash flow, build strong supplier relationships, and support overall financial stability.
AP can feel overwhelming with multiple vendors to pay, software subscriptions to track, and invoices to verify. Clear processes make it easier to stay organized and avoid missed payments or cash flow surprises.
What is accounts payable (AP)?
Accounts payable (AP) refers to short-term financial obligations—money your business owes to contractors, suppliers, and vendors for goods or services purchased on credit. It represents unpaid amounts due to any entity that has provided your company with something it has already received.
AP appears on your balance sheet as a current liability because it’s a debt your business must pay within one year or within its normal operating cycle. Payment is typically due in 30, 60, or 90 days, depending on the vendor’s terms.
AP tracks outstanding invoices for items like raw materials, inventory, utilities, subscriptions, and professional services. Clear AP records help you understand what you owe, plan cash outflows, avoid missed payment deadlines, and maintain healthy working capital.
Key components of accounts payable
The accounts payable team manages the invoice-to-payment process and keeps it running smoothly. An efficient AP workflow relies on several main components:
- Invoice: Document that outlines how much you owe a supplier or vendor for goods or services
- Purchase order: Document your company sends to a supplier requesting goods or services, with details on quantities, prices, and delivery terms; used as a reference when verifying invoices
- Payment terms: Agreed expectations for due dates, payment options, and any available discounts
- Vendor information: Supplier profiles that include contact details, tax forms, and vendor IDs
- General ledger (GL) code: Numbering system that categorizes financial transactions for accurate reporting and analysis
Managing accounts payable has a direct impact on your cash flow and liquidity, influencing how much cash you have available for day-to-day operations. Thoughtful payment timing helps keep cash levels healthy, preserve flexibility, and create opportunities to capture early payment discounts.
Poor AP management can lead to late payment penalties, cash shortages, and strained supplier relationships, all of which can disrupt operations. Strong AP practices also help balance payment schedules with revenue collection, which is especially important during seasonal slowdowns or economic uncertainty.
What’s the difference between accounts payable and accounts receivable (AR)?
While accounts payable is money a company owes to vendors and suppliers, accounts receivable (AR) is the money you’re owed by customers. A quick way to remember the difference between accounts payable and receivable: AP for "pay" and AR for "receive."
How to process accounts payable
The AP process includes receiving invoices, verifying their accuracy, routing them for approval, and making payments on time. Clear steps help your team stay organized and reduce the risk of delays or errors.
Step 1: Record invoices
Collect vendor bills through channels like email or your accounts payable system, and record their details in your accounting software.
Step 2: Verify expenses and get approval
Use 3-way matching to compare purchase orders, receiving reports, and vendor invoices before processing payment. Once verified, route the invoice to the appropriate managers or departments for approval.
Step 3: Execute payment
Schedule payments based on vendor terms and your cash flow needs. Disburse funds using the vendor’s preferred method, such as check, ACH, or wire transfer.
Step 4: Reconcile inconsistencies
Update your general ledger to reflect the payment and ensure all transactions are properly documented. Work with your AP team to resolve any issues or discrepancies.
How to calculate AP turnover ratio
The accounts payable turnover ratio shows how quickly your company pays its suppliers by measuring how many times you pay off your average AP balance in a year. A higher ratio means you pay vendors more frequently, while a lower ratio indicates slower payments.
The AP turnover ratio formula is: AP turnover ratio = Total supplier purchases / Average accounts payable
To find average AP, add the beginning and ending balances for the period and divide by 2:
Average AP = (Beginning AP + Ending AP) / 2
Consider this example:
- Total supplier purchases: $500,000
- AP balance on January 1: $80,000
- AP balance on December 31: $120,000
- Average AP: ($80,000 + $120,000) / 2 = $100,000
- AP turnover ratio: $500,000 / $100,000 = 5
This means your business pays off its average accounts payable balance five times per year.
Understanding AP turnover ratio
The AP turnover ratio offers insight into your cash management practices and vendor relationships. A high ratio may suggest you’re paying bills more quickly than necessary and forgoing the chance to use that cash elsewhere. A low ratio can indicate cash flow challenges or that you’re extending payments to preserve liquidity.
It’s helpful to compare your ratio to industry benchmarks and track it over time to identify trends. Pair it with other metrics, such as the cash conversion cycle, to understand how accounts payable fits into your broader working capital management.
AP workflow best practices
Use a consistent method for receiving invoices, approving them, processing payments, onboarding vendors, and reconciling the ledger at month-end. For example, an AP email inbox or vendor portal can centralize incoming invoices and reduce the risk of missed documents or duplicate submissions. Standardization also includes keeping an organized vendor master file with contracts, payment terms, contact information, W-9s, and historical invoices to minimize errors and compliance issues.
Implement compliance and internal controls
Compliance ensures your AP process follows laws, regulations, and internal policies. Internal controls help prevent errors, fraud, and mismanagement by adding safeguards throughout the workflow. Key practices include:
- Segregation of duties: Assign different people to key responsibilities. The individual approving invoices should not process payments, reducing AP fraud risk
- Authorization hierarchies: Set approval thresholds by invoice amount so smaller purchases require fewer sign-offs than larger ones
- Vendor master file controls: Verify and approve changes to vendor information before updating payment details
- Documentation retention: Maintain accurate records, such as invoices, purchase orders, goods receipts, and payment confirmations, to support audits and resolve disputes
- Clear policies and procedures: Document AP steps and update them regularly, then train your team to ensure consistent execution
Strong controls create a reliable AP process, support accurate reporting, and build trust with stakeholders.
Conduct regular audits
Routine audits confirm that invoices are processed accurately, approvals follow policy, and payments align with vendor terms. Regular reviews also help detect unusual patterns or discrepancies early, preventing costly issues and reinforcing compliance.
Audits often include tracking KPIs such as invoice processing time, average days payable outstanding (DPO), error rates, and discount capture. Reviewing these metrics highlights inefficiencies and supports continuous improvement across the AP workflow.
Benefits of AP automation
Automating accounts payable transforms how you manage invoices and payments, reducing manual work and improving accuracy across the entire workflow. Automation reduces AP errors, eliminates repetitive tasks, and streamlines approvals and payments. It can also improve cash flow management and free up time for more strategic work.
| Benefit | Description | Example |
|---|---|---|
| Error reduction | Reduces manual entry mistakes and prevents duplicate payments | Use OCR to capture invoice data automatically, minimizing manual input |
| Time savings | Helps staff focus on higher-value tasks | Route invoices to the right managers automatically to avoid delays |
| Improved cash flow management | Schedules payments to avoid late fees and optimize cash flow | Use a dashboard showing invoices due this week, next week, and next month |
| Increased vendor satisfaction | Supports timely, accurate payments and smoother onboarding | Send automatic notifications when invoices are received and paid |
| Enhanced compliance | Enforces tax rules and internal policies | Automate 3-way matching and set alerts for unauthorized spending |
| Actionable insights | Highlights spending trends and inefficiencies | Monitor metrics like invoice processing time to refine workflows |
| Scalability | Adapts as invoice volume grows | Reduce training needs by having software handle increased volume |
Calculating ROI for AP automation
Before switching to an automated AP system, you should calculate the ROI on using AP software to confirm it’s worth your time.
Your ROI using AP automation can be calculated by first adding up your estimated yearly savings on labor, error reduction, early discounts, late fees, and paper processing. Then, determine the total cost of purchasing and renewing AP licensing software every year.
You can then plug these numbers into the classic ROI formula:
ROI = ([Annual savings – Annual costs] / Annual costs) * 100
So if your company estimates $20,000 in savings every year and the cost of implementing AP software is $10,000 per year, your ROI would be 100%.
ROI = ([$20,000 – $10,000] / $10,000) * 100 = 100%
A positive ROI means the savings outweigh the costs; the higher the percentage, the greater the return.
Features of AP automation software
AP automation software features that are right for you depend on your business’s size, industry, and specific needs. For instance, companies processing fewer than 500 invoices a month may require a simpler tool than those handling thousands. However, most AP automation providers include these essentials:
- OCR technology: Scans invoices and extracts key data, such as vendor details, charges, and due dates; standardizes data capture to improve accuracy and reporting reliability
- Automated matching: Uses 2- or 3-way matching to compare invoices against purchase orders, receipts, or contracts to ensure details align; prevents overpayments and duplicate payments
- Electronic approvals: Routes invoices digitally to the appropriate approvers; helps maintain deadlines and create transparency across the approval process
- Invoice verification: Checks for duplicates, fraud indicators, or policy violations; enforces internal controls to reduce security and compliance risks
- Vendor portal: Provides suppliers with a self-service platform to onboard, submit invoices, track payment status, and update their information; supports transparency and improves vendor satisfaction
- Integration capabilities: Connects your AP automation software with accounting systems, procurement tools, and banking platforms; keeps financial records accurate with real-time syncing
- Tracking and storing AP documents: Secures invoices, approvals, receipts, and audit logs in a centralized digital location; improves audit readiness and reduces the risk of lost or damaged documents
- Analytics reporting: Collects and analyzes AP data, such as spending patterns and vendor performance; tracks KPIs to optimize AP efficiency and flag compliance issues
You may also want to evaluate customer support and the software’s total cost, not just the initial price.
How to transition from manual to automated AP
Manual AP processes rely on physical documents, spreadsheets, or basic accounting tools, which become slow, error-prone, and difficult to scale as your business grows. Moving to an automated system can save time and reduce costs.
Step 1: Assess your current AP processes and define your goals
Map your AP cycle from invoice intake to payment. Identify repetitive or labor-intensive tasks, inflated costs, and bottlenecks. Then set clear goals for automation, such as improving speed, accuracy, cost control, visibility, or compliance, and define measurable KPIs to track success.
Step 2: Evaluate and select AP automation software
Compare platforms based on features that match your goals, such as OCR, matching, approvals, integrations, and analytics. Assess scalability, security, and vendor support, consider software licensing and renewal costs, calculate expected ROI, and ensure the solution fits your ERP environment.
If you’re a growing company, you may want to explore AP software for small businesses as they're easier to implement and tailored to leaner teams.
Step 3: Prepare your vendor data for importing
Organize and standardize your vendor documents before migration. Remove duplicates, update missing or inconsistent information, and confirm accuracy to prevent setup issues later.
Step 4: Configure and test your AP system
Set up approval workflows, matching rules, user roles, and access permissions. Integrate the AP software with your ERP, import sample invoices, and test the system to confirm everything works as expected.
Step 5: Train your AP staff
Provide workflow documentation and hands-on training for your AP team. Create handbooks, templates, video guides, and other resources to support onboarding and build confidence in the new system.
Step 6: Roll out in phases and monitor performance
Start with a pilot group, such as a subset of vendors or departments, and refine settings based on feedback. Expand gradually until all invoices flow through the automated system. Track KPIs like exception rates and invoice volume, and update processes as your business needs evolve.
Overcoming AP challenges: Solutions for AP teams
Your accounts payable department faces several challenges that can slow down invoice processing or create financial risks. Common issues include:
- Invoice errors: Manual data entry can lead to typos, duplicate invoices, or mismatched amounts. Automated invoice capture and matching validate data before it enters the workflow.
- Late payments: Invoices may slip through the cracks, leading to vendor dissatisfaction. An automated AP schedule ensures invoices are processed and paid on time
- Vendor disputes: Discrepancies between purchase orders and invoices can delay payments. Maintain clear communication and accurate vendor records to reduce inconsistencies.
- Fraud and compliance risks: Stay current on regulations and use fraud detection tools to catch fraudulent invoices, unauthorized purchases, or policy violations
- High invoice volume: As your company grows, you’ll manage more purchase orders, vendors, and invoices. AP automation helps handle increased data entry and approvals without slowing down operations.
Streamline AP with Ramp Bill Pay
Ramp Bill Pay is an advanced, AI-driven accounts payable solution engineered to tackle the toughest AP challenges. From seamless invoice collection and line-item extraction to scheduled payments and simplified reconciliation, Ramp automates data entry, routes invoices for approval, and easily syncs with your ERP—accelerating month-end close and reducing manual work.
Ramp ranks among one of the easiest AP automation solutions to use based on G2 reviews (as of June 5, 2025), with an average score of 4.8 out of 5 stars from over 2,000 verified users. Businesses ranging from small to mid-sized have already seen results with Ramp. The Hospital Association of Oregon shortened AP processing from 10 hours per batch to just a few minutes, and SAM Construction Group saved 1-2% on invoices by paying vendors earlier with Ramp.
Ramp Bill Pay comes with a suite of specialized features:
- Seamless two-way matching of invoices to purchase orders
- Smart invoice scanning powered by AI, including GL code suggestions
- Automated approval routing with tailored user permissions
- Automated scheduling for recurring bills, batch payments, and vendor payment tracking
- Real-time ERP syncing for NetSuite, QuickBooks, Xero, and other platforms
Discover a better way to manage AP, and experience Ramp Bill Pay for yourself.
FAQs
Startups run lean AP operations. One person typically handles everything from invoice processing to payments, often using basic tools like spreadsheets or entry-level accounting software. Their focus: preserving cash and building vendor relationships.
As companies grow into SMBs, they need more structure. They add dedicated AP staff, create clear approval workflows, and implement specialized software to manage higher invoice volumes and control spending.
Enterprises operate at a massive scale. Their AP departments process thousands of monthly invoices across multiple business units. This requires sophisticated automation, multi-level approvals, robust controls, and seamless ERP integration.
Accounts payable workflows vary by industry. For example, healthcare AP teams must verify medical coding, match explanations of benefits (EOBs), and manage documents in a HIPAA-compliant manner. Prompt supplier payments can also help capture discounts on medical supplies.
In manufacturing, AP processes are closely tied to inventory and production systems. Teams rely on three-way and four-way matching to verify materials before payment and must also manage international supplier relationships, handle currency conversions, and prepare customs documentation.
Professional services firms build their AP workflows around projects and client billing. Their systems assign expenses to specific clients, track billable versus non-billable costs, and process subcontractor payments efficiently. Integrating time-tracking can further connect vendor services to billable hours.
Go digital from day one. Even with few invoices, a digital system for capturing, approving, and storing documents prevents future headaches. Cloud solutions with mobile access let founders approve payments anywhere.
Ask for better payment terms. Many suppliers will extend terms—especially if you share your growth plans. Request net-45 or net-60 instead of standard net-30 to improve your cash position.
Use virtual cards whenever possible. They offer clear advantages over ACH or checks: Better cash flow control, potential rewards or cashback, and enhanced security with single-use numbers and spending limits.
Manual data entry creates bottlenecks as you grow. Rising invoice volumes overwhelm paper processes, causing payment delays and vendor frustration. OCR technology can dramatically reduce this burden by automatically extracting invoice data.
Approval delays hurt your bottom line. Busy managers often deprioritize invoice approvals, causing you to miss early payment discounts. Mobile approval apps and automated reminders keep the process moving without requiring major workflow changes.
Cash visibility suffers without automation. Finance leaders struggle to forecast accurately when they lack real-time insight into upcoming payment obligations. Modern AP systems provide dashboard views of pending liabilities and payment timing options.
Enterprises deploy comprehensive AP solutions that integrate with their ERP systems. These platforms manage the entire process from invoice capture to payment reconciliation. They standardize workflows across business units while accommodating regional requirements.
Data analytics drive strategic decisions. Enterprise AP teams use payment data to identify spending patterns, negotiate better vendor terms, and capture early payment discounts. Predictive analytics also help forecast cash needs and optimize payment timing across thousands of vendors.
Supplier portals reduce administrative overhead. These secure platforms let vendors: submit invoices electronically, check payment status, update their information, and communicate with AP staff. This cuts down on vendor inquiries while improving supplier satisfaction.
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