The AP Process: A Step-by-Step Guide to Accounts Payable

Accounts payable (AP) is an accounting term for money you owe suppliers or vendors for goods and services you’ve received but have not yet paid for.

Your AP process makes all the difference in ensuring your business finances are in order. Staying on top of AP means you’re never behind on bills or payments, helping you build trust with your suppliers and ensuring strong vendor relationships.

An efficient AP process also helps you stay on top of cash flow and resource management and reduces the risk of fraud—all good things to aspire to.

In best practice, AP management should adhere to a process. Doing so streamlines the workflow and helps you identify errors quickly, helping you maintain positive cash flow and providing accurate insights into your company’s financial health.

Understanding the AP Process

Before we get into optimizing your AP workflow, let’s look at a typical AP process.

1.        Place an order for the product or service. Orders are placed in various ways. You might issue a purchase order (PO), order a product online, over the phone, by email, or by whatever method your supplier encourages. It could also be a recurring order, such as supplies you receive monthly.  

The PO will list the items in the order, the cost, how many items, the terms of payment, and the delivery details.

2.        Order receipt. Once the item arrives at your location, the receiver checks the delivery receipt against the invoice to ensure it matches. Three-way matching takes this step further by including the PO, the invoice, and the delivery slip. This way, you’ll ensure that what you ordered and what arrived is what you expected. 

·      First, check the PO to confirm the order’s expectations.

·      Then, check the delivery or packing slip to see if it matches the PO.

·      Finally, check the supplier’s invoice to match it to the delivery slip and the PO. This final step is critical as you must ensure the supplier sends all the items and charges you the correct amount.

Since the person checking the order is (usually) not in the finance department, this adds an extra layer of accountability and ensures you’re not paying for product you did not receive.

3.        Receive the invoice. Your supplier issues an invoice. Review the invoice to ensure accuracy – especially if you typically receive invoices that include multiple orders.

4.        Process the invoice. Invoices are entered into your accounting system and categorized as accounts payable.

5.        Approval. Invoices are approved for payment according to your workflow. Leveraging automation helps ensure invoices get to the right people quickly to be approved and paid. Assigning approvers for different types of invoices or even automating smaller invoice approvals reduces payment delays while mitigating unapproved spending.

6.        Payment. Once the invoice is approved, it moves to payment and is entered into the accounting system. This process can also be automated for efficiency.

7.        Reporting. The invoice is recorded as paid. Your AP balance is reduced, and your cash is decreased by that amount.

A Step-by-Step AP Workflow

These steps represent AP best practices with suggestions on streamlining and simplifying the workflow.

1.      Centralize accounts payable.

Consider outsourcing your AP to an accounting firm or a dedicated employee who can own the AP process. Assign roles within your AP team for invoice processing, approvals, and payments. If you deal with multiple vendors, set up a vendor portal where they can check the status of their invoices. Doing so will reduce inquiries significantly.

2.      Go paperless

Prioritize digital AP workflows and encourage your vendors to do the same. The more touchpoints along the way, the greater the potential for something to fall through the cracks. Paper invoice processing is costly. Online processing puts financial data at your fingertips and offers a more holistic view of your company’s finances.

3.      Enable recurring payments

If you have regular orders, set up recurring automated payments to take the heat off your finance team. You will still need to review them periodically to ensure they reflect current vendor agreements.

4.      Communicate with vendors regularly

Good communication builds trust and helps to solidify strong relationships. Regular conversations help you stay on top of service changes, avoid discrepancies, and better align with key suppliers. Work with your vendors to establish clear expectations and terms. Consider negotiating early payment discounts. For example, if you currently pay on a net 30 basis, your vendor might incentivize net 10 with a small discount.

5.      Always be improving

If there are ways to improve your AP process, encourage your team to implement them. New trends, software, and integrations may enable significant improvements, reducing costs and making your employees’ lives easier. Encourage learning and development and benchmark your processes against your peers to stay on the leading edge.

6.      Audit your processes periodically

Regular AP audits help you identify issues and areas ripe for improvement. As your business grows, needs will evolve, and you must ensure the process is as efficient as possible.

Use analytic data to track performance metrics, such as the number of on-time payments and average processing time.

Always be on the lookout for workflows that can be automated, as it will free up your team for higher value, business-building activities. A few ways that automation can help are by reducing data entry errors, eliminating manual paper workflows, and ensuring payments are made on time.

Bonus Tips to Drive AP Success

Now that your AP workflow is fully optimized, you might want to think about leveling up your strategy with a renewed focus on compliance and security.

Regulatory and tax compliance are essential, and sound financial management is the key to success. Maintain clean books and accurate records and meticulously audit accounting software against seed-to-sale systems to ensure everything lines up.

Keep your teams updated on compliance issues and loop your finance team in on the conversation to ensure AP policies align.

If you require support with AP, reach out to the experts at Growise. We provide outsourced bookkeeping, accounting, and tax preparation for cannabis businesses, and we’d love to show you how we can help.