What are accounts payable? Process, benefits, and best practices

Managing finances is the cornerstone of any successful business, and one of the most critical aspects of financial management is accounts payable.

Traditionally, the accounts payable process has heavily relied on manual methods for handling invoices, verifying payments, and maintaining records. This reliance often leads to inefficiencies and errors, with 33% of global businesses experiencing delays in international payments.¹ With these challenges, more financial leaders are now using automation to optimise their accounts payable process.

Key takeaways:

• Accounts payable management is crucial for your company to maintain its financial stability.

• Maintaining accurate records of all outgoing payments gives valuable insights into your company’s financial health. They help reveal spending patterns, identify inefficiencies, and ensure compliance.

• Accounts payable automation software minimises errors, improves visibility, simplifies approvals, and strengthens supplier relationships.

What are accounts payable?

Accounts payable (AP) is the money your company owes suppliers, vendors, or service providers for goods or services received but not yet paid for. These short-term debts are recorded as current liabilities (outstanding bills) on your balance sheet. Longer-term, high-value debts, like mortgages, aren't included in accounts payable.

Accounts payable is a key part of your working capital. These debts directly affect how your company maintains a stable cash flow, meets financial obligations, and builds trust with suppliers.

Managing your accounts payable helps maintain a healthy cash flow by optimising the timing of payments, letting you hold onto your cash longer and reinvest it into your business. For example, it can help ensure you pay your bills on time, helping you strengthen your relationships with suppliers and avoid late-payment penalties.

Having accurate records of all outgoing payments also provides valuable insights into your company’s financial health by revealing spending patterns, identifying inefficiencies, and ensuring compliance with tax regulations. By analysing these records, you can track expenses, monitor cash flow, and make informed decisions about spend management.

The differences between accounts payable vs. accounts receivable

Both accounts payable and accounts receivable involve credit and spend management, but they work in opposite ways.

Accounts payable is a current debt you have, and focuses on tracking the amount of money you owe and how/when your company pays the debt. You receive invoices for goods or services you’ve ordered, track these invoices, review them for accuracy, and make sure they're paid.

Accounts receivable, on the other hand, are unpaid amounts that customers owe you. These amounts are considered liquid assets – that is, assets that can be converted to cash quickly. Accounts receivable focuses on how/when you’re paid for your goods or services. You send invoices to your customers and track when payments are due. With accounts receivable, you also follow up on overdue payments and maintain cash flow by ensuring your company receives payments on time.

The accounts payable process

The accounts payable process requires careful management at each stage. 

Here’s a step-by-step breakdown of the process:

1. Your company submits a purchase order (PO): A PO is a list of the items or services you’re purchasing, including the prices, any terms or conditions for the transaction, delivery dates, and the timeframe when the payment is due. It serves as a formal agreement that verifies the order is correct, and needs to be signed by your company.

2. The supplier fulfils the order: The supplier reviews the purchase order and accepts, modifies, or rejects it. If accepted, the supplier will fulfil the order.

3. Your company creates a receiving report: Once you receive the goods or services, you create a receiving report. This document verifies that the items or services you received match the details in the purchase order. It includes a breakdown of things like item descriptions, quantity, and any discrepancies found upon receipt.

4. Your company receives, reviews, and approves the supplier's invoice: After the goods or services are delivered and the receiving report is processed, your supplier sends an invoice for payment. Once you and your financial department have reviewed the invoice, you either approve it for payment or request a revision if there are any inaccuracies.

5. Your company records the invoice and schedules the payment: You document the approved invoice in your accounting system to keep track of your short-term debt and schedule the payment, being mindful of the due date.

6. Your company pays the invoice and documents it: You make the payment according to the agreed terms, which will be through an electronic payment network, such as ACH transfer in the US, cheque, credit card, or any other agreed-upon payment method. After making the payment, you reconcile it in your accounting system, ensuring that your accounts are up-to-date..

The challenges of accounts payable for a business

Traditionally, managing accounts payable has been a manual task. For example, an accountant might compare line items between a purchase order and an invoice side-by-side. This approach not only increases the risk of financial mistakes but can also impact company growth. When you manually handle data entry and documentation, you're more likely to make mistakes, especially when dealing with a high volume of transactions. These errors can lead to incorrect payments, delayed invoices, and strained relationships with your suppliers.

Manual processes and disconnected systems in accounts payable also create opportunities for fraud. For example, if your billing system doesn't sync with your payment system, it’s easier for someone to manipulate records or make unauthorised payments without being noticed.

Balancing cash flow and meeting payment obligations is another challenge in accounts payable. You need to ensure you have enough funds to pay off your short-term debts without compromising other financial commitments. Cash flow becomes more difficult when working with international vendors, since fluctuating foreign exchange (FX) rates can result in unexpected costs.

Understanding the accounts payable team

Your accounts payable team handles your company's outstanding short-term debts to vendors and suppliers. They ensure that invoices are properly verified, approved, and paid.

The main duties of the accounts payable team include:

• Receiving and checking invoices: Invoices from suppliers are reviewed against the original purchase order to ensure accuracy.

• Assigning expense codes and sending for approval: After reviewing invoices, unique expense codes are assigned to each before being sent to the financial department or other decision-makers for approval.

• Scheduling payments: Once the invoices are approved, payments are scheduled for the due date.

• Maintaining documentation: Records are uploaded, reviewed, and maintained in the accounting system, including vendor information, payment terms, and completed invoice payments.

• Reconciling statements: Your company's payments and transactions records are compared with vendor ‌statements to ensure they match. If there are any discrepancies, these are investigated.

Although the tasks for your accounts payable team are straightforward, manual workflows and disconnected systems can make the entire accounts payable process disorganised. In fact, 71% of companies globally find their current systems inefficient and unreliable.¹ Your accounts payable team might use one system for uploading and tracking invoices and another for internal approvals. Or, they may have to log in to your banking system to make the payment and then switch back to your small business accounting software to manually reconcile the payment. Because there’s so much switching back and forth between systems, the chance of misplaced decimals or typos increases, which can lead to inaccurate financial records.

Fortunately, accounts payable automation software can help resolve these challenges for your accounts payable team and improve your overall financial operations within one platform.

Automating accounts payable with software

Accounts payable software automates and simplifies your accounts payable process. It handles everything from receiving invoices to reconciling, so your accounts payable team can automatically capture invoice details, route them for approval, and initiate payments – no manual data entry needed.

Benefits of accounts payable automation

Accounts payable automation software offers advantages like:

• Less human error: Automated systems handle data entry and calculations, reducing the risk of mistakes. This automation ensures your financial records are accurate and consistent.

• Improved efficiency: Automation saves accounts payable teams hours by streamlining the entire accounts payable process, from receiving invoices to making payments.

• Enhanced visibility: Real-time tracking and reporting gives you a clear view of your bills, making it easier to forecast and budget.

• Strengthened security and compliance: Strong security features, like data encryption, help protect your data, reduce opportunities for fraudulent activities, and ensure compliance with regulatory standards.

• Simplifies approvals: Customised approval workflows ensure that invoices are reviewed and approved by the right departments quickly, reducing bottlenecks, and speeding up payment cycles.

• Improves supplier relationships: Consistently making timely payments enhances trust and fosters stronger partnerships with your suppliers.

Features to look for in an accounts payable software

If you’re thinking about using an accounts payable software, it’s important to consider several key features. Here’s a list of things to look for:

• Integration with existing systems and tools: Make sure the software can easily integrate with your current small business accounting software, like QuickBooks or Xero, as well as other business systems, like your enterprise relationship management (ERP) system.

• Automation capabilities: Robust automation features, like capturing and processing invoices using OCR technology, payment processing, and reconciliation are key to improving efficiency and accuracy in accounts payable.

• Customised approval workflows: The software should offer the option to create custom approval workflows to match your processes.

• Multi-currency support: If your company works with international vendors now, or will in the future, the software should support bill payments in multiple currencies.

• Tracking: The software should provide real-time tracking of invoices, payments, and financial transactions. This tracking helps you stay on top of your cash flow.

• Reports: Generating custom reports can help you analyse spending patterns, identify trends, and forecast more effectively.

• Scalability: As your company grows across borders, the software should be able to handle an increasing volume of transactions and more complex accounts payable processes. Additional features, such as built-in corporate cards and expense management tools, can help streamline visibility over company spend on one platform. 

• Security and compliance measures: The software provider should demonstrate the security measures they have in place to help protect your financial information and features that help you comply with global and local regulations.

Control your accounts payable and total global spend with Airwallex

By automating your accounts payables process – from uploading invoices to scheduling payments – you can remove manual tasks, reduce errors, and provide real-time insights into your company’s financial health.

With Airwallex, you not only streamline your accounts payable process with our Bill Pay software, but also gain a powerful tool for managing all aspects of your company’s spend. Our comprehensive spend management platform seamlessly integrates bill payments with our multi-currency wallets, company cards, and employee cards, giving you a unified view of your total global spend.

Here's how Airwallex can improve your end-to-end accounts payable process: 

• Automatically upload and process invoices from global vendors.

• Pay bills in multiple currencies from balances held in your multi-currency account, or convert funds at market-leading FX rates.

• Use local payment rails to avoid international transaction fees when paying suppliers in 120+ countries.

• Maintain full control with multi-layer approval workflows that align with your company’s spend policies.

• Reconcile faster with our accounting integrations, like NetSuite, Xero, and QuickBooks.

• Consolidate your accounts payables with employee and company spend with our Corporate Cards in one platform.

Source:

¹ Airwallex spend management research, NewtonX, August 2024