Keep your business healthy with Accounts Payable cycle automation

Accounts Payable cycle

The answer to many of your accounts payable questions may be found by learning more about the accounts payable cycle. The accounts payable cycle is the multi-step process necessary for businesses to purchase goods or services, ensure that goods are delivered, or services are rendered, and finally provide payment to the providing vendor(s). 

Depending on your organization’s needs, you may have several extra steps in the process regarding accounts payable. Examples of accounts payable liabilities may include items like raw materials, transportation for said materials, property or vehicle leasing, and subcontracting services (among many others – depending on your industry). 

From placing the purchasing order to receiving a receipt of goods or services rendered and finally to receiving an invoice from the seller and sending payment – these are the essentials of the accounts payable overview. Successful management of an accounts payable process is vital to the overall organization and efficiency of your business. 

Honest and open communication from the onset reduces the likelihood of mistakes or miscommunication later on in the cycle and can help your organization build stronger relationships with your vendors and clients. 

Timely processing of invoices and payment disbursement means that your business can avoid costly late fees and other penalties. Furthermore, it also strengthens your relationships with vendors and improves your brand recognition and prestige.

An organized, streamlined accounts payable process also enables the company to keep track of its purchases and can help your team identify whether or not purchasing needs to speed up or slow down to accommodate your business’s storage capacity or demand for your products. 

While there are numerous ways to help ensure the seamlessness of your accounts payable process, it remains a highly complex ordeal involving numerous changing variables and potentialities for things to go awry. 

To prevent issues like missing documents, making double payments, or theft and fraud, the accounts payable process management team must be organized, scrupulous, and attentive to the numerous nuances throughout the entirety of the accounts payable cycle. 

Accounts Payable cycle formula

Companies need to devise an accounts payable formula that suits their specific requirements. This ensures the process stays organized and that things do not fall behind schedule. There are several different approaches to coming up with this formula, all of which can give your team other insights into the process as a whole:

• Accounts payable cycle formula
• Accounts payable days formula
• Accounts payable ratio formula
• Accounts payable turnover formula.

Some of these formulas are synonymous or involve very similar aspects of the accounts payable process, but the average accounts payable formula will determine how much time passes before your business is able to pay its vendors. 

What is a good accounts payable turnover ratio? The answer will depend on how many purchases your organization makes and how quickly your team is able to pay down balances during a predetermined time frame.

Your company’s accounts payable turnover ratio is crucial to the longevity of your organization. Generally, businesses with higher accounts payable turnover ratios pay their bills more quickly than businesses with lower ratios. Maintaining a desirable ratio means new vendors could more easily recognize your organization as professional and trustworthy.

Accounts Payable guidelines

To determine your accounts payable strengths and weaknesses, it is generally helpful to develop a framework of accounts payable guidelines. It may also be beneficial to update or overhaul your accounts payable training manual, especially if you identify one or two weaknesses that could be improved upon. 

Your company’s accounts payable guidelines are responsible for the smooth operation of every accounting transaction (aside from payroll) your business undertakes. Guidelines can dictate qualifications for reputable, desirable vendors, for example. They are also essential to ensure that every invoice received matches the goods or services rendered. 

By complying with a well-defined set of accounts payable guidelines, you can better ensure that your accounts payable team stays on schedule. An overall reduction of errors means that your company spends less time following up on and correcting those errors, which allows for more efficient use of your business’s time and resources. 

Thoughtfully developing accounts payable guidelines that help streamline your process can mitigate many of the challenges involved with the procure-to-pay process example. Management that helps enforce adherence to your company’s guidelines can also save time, money, and headaches in the future. Keeping an organized record will also enable your organization to analyze your spending trends and help your accountants prepare tax information when necessary. 

Accounts Payable process steps

Accounts payable processes can be highly complex and convoluted, especially if your organization is larger and deals with many vendors and clients. There are vendor payment policies and procedures to which your company must adhere, among several other accounts payable process steps.

Researching a sample accounts payable policy and procedures manual may help you determine a successful process that works for your business. Documents from your competitors or other companies within your marketplace can help you to formulate your strategy. 

Whatever the specifics are for your enterprise, industry standards mandate a basic process that most (if not all) companies comply with, such as:

• Identify the vendor selling the products or services you want
• Place a purchase order with that vendor
• Receive the products or services
• Disburse payment for the products or services.

Although additional steps can be added to these fundamental processes, the cycle remains the industry standard. Companies investing in the optimization of their accounts payable process can better secure the longevity of their enterprise by eliminating costly mistakes. 

Accounts Payable procedures manual

Once your organization has determined both necessary and unnecessary process steps within your accounts payable procedures (adhering to all vendor payment policy and procedures), you can more sensibly put together an accounts payable procedures manual. 

It’s beneficial to outline your accounts payable policies and procedures for training purposes but also to help organize and maintain your company’s internal affairs. You can configure your accounts payable policy in a document like an accounts payable manual (PDF) or in easy-to-understand accounts payable procedures flowchart. 

A manual like this should also show you how the procure-to-pay process SAP works and may even include a procure-to-pay process PDF. Procure-to-pay (or P2P) connects the AP process to all the activities a business needs to do in order to meet its needs and continue to grow. 

A thorough accounts payable procedures manual provides your employees with a valuable resource to help them navigate the many challenges of the accounts payable process. Without a rigorous, meticulously put-together manual, anomalies your team could encounter might result in an unnecessary error or something falling through the cracks. Fewer errors result in less time being spent to rectify said errors, which enables your team to stay on schedule and on task.

Your company’s accounts payable procedures manual ought to include details about your company’s specific policies as well as information about the policies of your vendors. If your organization deals with dozens or hundreds of vendors, then your accounts payable procedures manual could still provide information about your primary vendors in order to preserve those relationships. 

Best practices in Accounts Payable process

One might consider the best practices in accounts payable process to include, at the very least, maintaining the integrity of your organization by ensuring payments are sent out on time. Still, there are so many intricacies involved that “best practices” for your organization may differ from even your closest competitors. 

You may also discover new, advantageous accounts payable organization ideas by allowing your team to contribute and ask questions during an accounts payable process improvement presentation. Getting a view of the big picture can be really helpful. That’s why we recommend reviewing an accounts payable end-to-end process PDF online. 

To determine what the best practices are for your organization, consider what works well for other companies as well as basic common sense principles. For example, prioritizing invoices is a good practice because it shows vendors that your company is punctual, professional, and trustworthy. 

Another best practice might be entirely internal; perhaps your team invests in accounts payable automation technology to help your team reduce errors and keep things organized. You can also provide your accounts payable team with a detailed guideline or manual with information about your policies and step-by-step instructions related to specific procedures.

A sample accounts payable policy and procedures manual may include information on how to organize accounts payable invoices, an accounts payable internal control checklist, or any relevant information your business wishes to include. 

P2P process in Accounts Payable

The procure-to-pay procedure (also known as the P2P process in accounts payable) incorporates each step involved – as the name implies – from procurement to payment. Procure-to-pay best practices can encompass thoughtful and open communication with vendors as well as a timely acknowledgment of receipts and expeditious disbursement of payment. To learn more about the P2P process, it can be helpful to review an online procure to pay process PPT. 

Regardless of your organization’s short or long-term goals, taking steps to ensure the smooth operation of your P2P procedures in accounts payable can be an effective method for improving your company’s organization and workflow across the board. An efficient P2P workflow can help by increasing the likelihood that ordered products or services arrive on schedule, and prompt payment for said products or services can bolster established relationships with vendors or strengthen a relationship with a newer vendor. 

When your company’s P2P process in accounts payable is streamlined for efficiency, it can have a positive impact on the rest of your enterprise. Maintaining an organized process is a key factor for the success of many organizations, especially within the realm of accounts payable.