Accounts Payable Process (P2P) : 9 Best Practices

Mastering the Accounts Payable Process (P2P Process) for Efficient Financial Management

Accounts Payable Process is a key component of every business’s management and oversight of its financial operations. In this procedure, the company’s debts are managed, and on-time supplier and vendor payments are made. The P2P (Procure-to-Pay) (Accounts Payable Process) is a series of stages that begin with the purchase requisition and end with the vendor payment.

Accounts Payable Definition:

Accounts Payable refers to the amount of money a company owes to its suppliers or vendors for goods and services purchased on credit. It is a crucial component of a company’s balance sheet and represents the company’s short-term liabilities.

The Accounts Payable process involves recording, verifying, and processing invoices and facilitating timely payments to maintain positive supplier relationships.

Accounts Payable Process (Procure to Pay) (P2P) Flow:

The Accounts Payable Process involves several steps to ensure a streamlined and organized workflow. The typical process flow includes:

1. Purchase Requisition: The process begins with the purchase requisition, where a department requests the purchase of goods or services.
2. Purchase Order (PO) Creation: Once the purchase requisition is approved, a purchase order is created, specifying the quantity, price, and terms of the purchase.
3. Goods Receipt: When the goods or services are received, the receiving department verifies them against the purchase order to ensure accuracy and quality.
4. Invoice Verification: The AP team matches the invoice with the purchase order and goods receipt to validate the accuracy of the billing.
5. Invoice Processing: Approved invoices are then processed for payment, and necessary journal entries are recorded.
6. Payment Processing: Finally, payments are made to suppliers, following the agreed terms and conditions.

The following 9 Accounts Payable (P2P Process) Best Practices will be covered in this post and will help to speed up the procedure:

1. Importance of Accurate and Timely Payments
2. Internal Control in Accounts Payable Process
3. Accounts Payable Process and Working Capital Management
4. KPIs in Accounts Payable Process
5. Major Important Reports in Accounts Payable Process
6. Accounts Payable Best Practices
7. Risks in Accounts Payable
8. Handling Exceptional Cases in Accounts Payable
9. Qualifying Fraud in Accounts Payable

1. Importance of Accurate and Timely Payments:

Strong relationships with suppliers and vendors depend on accurate and timely payments. Reputational damage and supply chain distractions could result from delayed payments, which can also strain these partnerships. On the other hand, paying bills on time raises the company’s creditworthiness, promotes early payment discounts, and builds goodwill with suppliers.

In addition, precise payments guarantee that the business is only billed for the goods and services it has actually received, avoiding overpaying or disagreements. The utilization of technology-driven matching systems and meticulous invoice checking are what allow for this precision.

2. Internal Control in Accounts Payable Process (P2P Process):

Internal control measures are crucial to maintaining the integrity of the Accounts Payable Process and preventing fraudulent activities. Some effective internal control measures include:

1. Segregation of Duties: Separating duties between different employees involved in the AP process to ensure that no single person has complete control over the entire process.
2. Invoice Approval: Set up a thorough approval procedure for invoices, which would allow you to confirm their validity and correctness before processing your payment.
3. Vendor Master File Management: Regularly reviewing and updating the vendor master file to prevent any duplicate or fake vendors from receiving payments.
4. Purchase Order Matching: Verifying invoices against purchase orders and goods receipts (GRN’s) to ensure that payments are made only for valid and authorized transactions.
5. Regular Reconciliation: Periodically reconciling AP records with vendor statements to identify any discrepancies and resolve them promptly.

3. Accounts Payable and Working Capital Management:

Effective management of accounts payable is closely linked to the overall Working Capital Management of a company.

"Working capital is the difference between current assets (such as cash, accounts receivable, and inventory) and current liabilities (including accounts payable and short-term debts)."

Maintaining an optimal level of working capital is crucial for a company’s financial stability and growth. Proper management of accounts payable can positively impact working capital in the following ways:

1. Cash Flow Optimization: Efficient accounts payable processes ensure that payments are made on time while taking advantage of early payment discounts. This optimizes cash flow and allows the company to retain cash for other business needs.
2. Reduced Days Payable Outstanding (DPO): DPO measures the average number of days it takes a company to pay its suppliers. Extending the payment terms, while honouring contractual obligations, can improve DPO, giving the company more time to use cash for other investments.
3. Improved Supplier Relations: Maintaining good relationships with suppliers can lead to favourable payment terms, discounts, and increased trust, which may translate into extended credit periods.
4. Inventory Management: Effective accounts payable management enables a company to negotiate better inventory terms, maintain optimal stock levels, and reduce the cost of carrying inventory.

4. KPIs in Accounts Payable (P2P):

Key Performance Indicators (KPIs) help measure the efficiency and effectiveness of the Accounts Payable Process. Some essential KPIs include:

1. Invoice Processing Time: The average time taken to process an invoice from receipt to payment.
2. Early Payment Discount Capture Rate: The percentage of early payment discounts availed by the company.
3. Invoice Accuracy Rate: The percentage of invoices that are accurately matched with the purchase orders and goods receipts.
4. Vendor Satisfaction: Measuring vendor satisfaction through feedback and timely payment records.
5. Payment Cycle Time: The average time taken to make payments after invoice approval.

5. Major Important Reports in Accounts Payable (P2P):

Various reports are essential in managing the Accounts Payable Process and gaining insights into the company’s financial health. Some major reports include:

1. Accounts Payable Aging Report: A report that categorizes outstanding liabilities based on their due dates, providing an overview of the company’s short-term obligations.
2. Cash Flow Forecast: This report projects future cash flows based on accounts payable and accounts receivable data, helping with cash management.
3. Open Advance (Debit Balance) Report:  this report highlights the open advances or debit balances of various vendors / suppliers / contractors, given as advance amount under various Purchase orders or work orders or any agreement. Should be verify at the time of actual payment.
4. Vendor Analysis Report: Analyzing vendor performance, including payment history, credit terms, and discounts, to optimize vendor relationships.
5. Invoice Discrepancy Report: A report highlighting discrepancies between invoices, purchase orders, and goods receipts, helping identify process inefficiencies.
6. Expense Analysis Report: A detailed analysis of all expenses incurred by the company, categorized by vendors and expense types.

6. Accounts Payable (P2P) Best Practices:

To ensure smooth operations and maintain financial health, businesses should adopt these best practices in their Accounts Payable Process:

• Document Management: Maintaining a centralized repository for invoices, purchase orders, and goods receipts helps in easy retrieval and reduces the chances of missing documents.
• Segregation of Duties: As mentioned earlier, separating roles and responsibilities among different team members ensures a system of checks and balances.
• Regular Reconciliation: Periodically reconciling accounts payable records with vendor statements and general ledger balances can identify discrepancies and prevent financial inaccuracies.
• Early Payment Discounts: Taking advantage of early payment discounts can lead to cost savings, improving the company’s overall financial position.
• Vendor Management: Regularly reviewing vendor performance and conducting vendor evaluations can aid in identifying reliable suppliers and optimizing vendor relationships.
• Continual Process Improvement: Emphasizing continuous improvement allows businesses to identify inefficiencies and implement changes to enhance the Accounts Payable Process continually.

7. Risks in Accounts Payable (P2P Process):

While Accounts Payable is a critical process for any organization, it also comes with inherent risks. Some common risks associated with the AP process include:

1. Duplicate Payments: The risk of making multiple payments for the same invoice, resulting in financial losses.
2. Invoice Fraud: The possibility of receiving fraudulent invoices from scammers or fictitious vendors.
3. Incorrect Payments: Making payments for incorrect quantities, prices, or terms due to manual errors.
4. Late Payments: Failing to make timely payments, leading to strained supplier relationships and potential supply chain disruptions.
5. Compliance Issues: Non-compliance with legal and regulatory requirements, leading to penalties and reputational damage.

8. Handling Exceptional Cases in Accounts Payable Process (PTP):

Despite streamlined processes and robust systems, exceptional cases may arise in the accounts payable workflow. Some common exceptional cases include:

• Disputed Invoices: In the event of a disagreement between the company and the vendor regarding the invoice amount or quality of goods, the invoice is flagged for resolution.
• Missing Goods Receipt: When the goods receipt cannot be matched with the invoice and purchase order, further investigation is required before proceeding with payment.
• Duplicate Invoices: Identifying and resolving duplicate invoices to prevent over payment and maintain financial accuracy.
• Payment Holds: Occasionally, payments may be put on hold due to internal or external factors, such as a vendor’s financial instability or regulatory requirements. Handling exceptional cases effectively requires a well-defined escalation process, clear communication with vendors, and prompt resolution to maintain a smooth accounts payable process.

Read More about Interview Question Answers: Accounts Payable

9. Qualifying Fraud in Accounts Payable (P2P) Process:

Accounts payable is vulnerable to various types of fraud, including invoice fraud, payment diversion, and phantom vendor schemes. To mitigate these risks, companies must implement robust fraud prevention measures, such as:

• Regular Vendor Audits: Conducting periodic audits of vendor master files to identify and remove any suspicious or unauthorized vendors.
• Segregation of Duties: Separating responsibilities among different team members to prevent collusion and ensure a system of checks and balances.
• Invoice Approval Workflows: Implementing stringent approval processes for invoices to verify their legitimacy before processing payment.
• Fraud Detection Software: Utilizing fraud detection software to identify unusual patterns or anomalies in accounts payable transactions.