Improving your company's accounts payable and purchasing process may not necessarily make the headlines, but it can ensure profitability and sustainability.
Effectively using proper accounts payable and purchasing procedures, checklists, tools and templates can improve accuracy, reduce costs, enhance efficiency and provide greater visibility into cash flow management.
Accounts Payable and Purchasing Process
The accounts payable and purchasing process flows in two directions: upstream and downstream.
Upstream
The upstream workflow includes activities that take place between the initial purchase and vendor invoice processing—procurement activities for the most part. Steps are taken to find the right vendor by ensuring they are willing to negotiate in good faith. The business will typically ensure that the sourcing is strategic and that the contract terms work for both parties. Typical upstream activities include:
- Requesting to have the purchase approved before contacting a vendor
- Negotiating with vendors
- Choosing a vendor
- Signing the vendor contract
- Documenting and sending the purchase order to procure the goods
- Receiving the invoice
- Verifying the invoice
Downstream
The downstream workflow includes all activities that happen after the transaction takes place, such as paying vendors and managing financial data. The business will want to ensure that goods and services have been received with an invoice that is verified and paid. Accounts payable will typically compare the invoice data with the original purchase order. Typical downstream activities include:
- Processing the payment to the vendor using their preferred method
- Recording all transaction data
- Communicating with the vendor and reconciling any data to ensure accuracy
- Reporting on all requested data for reporting or KPIs
- Conducting audits to ensure the accuracy of all data and internal controls
In both upstream and downstream workflows, it is critically important to limit errors, be as productive as possible and manage risk by strengthening internal controls.
Accounts Payable and Purchasing Procedures
While the activities and measures taken within the accounts payable and purchasing team may vary depending on the size of the organization, several things should be considered in your accounts payable and purchasing procedures, regardless of the size of the organization.
Define and Communicate Processes and Procedures
Well-documented policies and procedures are the foundation of any accounts payable and purchasing process. Ensuring that documentation is updated and receives proper approvals is fundamental.
Communicating all changes is just as important. Effective communication will allow those in the AP and purchasing departments to understand the changes and adapt fully. Effective communication will also ensure that new employees understand department policies and procedures.
Establish Clear Roles and Responsibilities
Delineating the authority and responsibilities of team members ensures that all tasks are allocated appropriately based on their roles. This makes it easier for everyone to work collaboratively.
Roles also play an important part in access rights to properly safeguard financial data, restricting access to information to only those who need it and avoiding potential misuse or security risks. Access rights based on roles are an important part of anti-fraud measures.
Create and Track KPIs
Leveraging KPIs to track AP and purchasing goals is essential for any organization. KPIs do much more than track goals; they enable you to take immediate action to improve your bottom line. Here are several KPIs to consider:
Invoice Processing Time: This metric measures the time it takes to process an invoice from receipt to payment. This is often calculated as an average. Longer times may lead to late payments and potential fees. Conversely, shorter processing times may provide opportunities for early payment discounts.
Invoice Processing Cost: When all costs related to processing an invoice are totaled, it can be expensive. Include tasks such as data entry, routing and any follow-up activities. This metric is a good measure of AP and purchasing efficiency.
Invoice Error Rate: Also called an invoice exception rate, this metric measures the number of invoices that contain mistakes or inconsistencies. A high rate could indicate issues with data entry or validation.
Accounts Payable and Purchasing Tools
Organizations have a variety of tools that they can leverage to both streamline and strengthen the accounts payable and purchasing process. Below are two common tools to consider:
Vendor Management Programs
Many organizations develop a vendor management program to maximize the benefits of their vendors, including reducing risk and improving relationships.
This type of program is appropriate no matter the size of the organization because it can clearly define decision-making processes, including escalation procedures.
Key elements of any vendor management program include:
Governance: Governance details the organization's approach to vendor management, including naming those individuals involved in vendor management and the roles they play.
Policies and Procedures: This may include policies and procedures for vendor selection, contract execution, vendor onboarding and monitoring.
Risk Management: Describes how to identify, assess, mitigate and monitor vendor risk.
Contract Development: Contract development details the procedures for negotiation, drafting contracts and obtaining approval. This can include contract templates that are reviewed by legal, as well as negotiated service-level agreements (SLAs).
Relationship Management: Relationship management defines communication and engagement activities, including escalating conflicts and resolving issues.
Compliance: Compliance contains policies to ensure compliance with industry standards, internal policies and external regulations. It includes processes to ensure due diligence.
Accounts Payable and Purchasing Automation
Many organizations are choosing to modernize their AP and purchasing processes. While this may carry a cost, there are clear benefits, such as increased productivity and reduced errors and risk.
While many organizations remain at least partially manual in their processes, according to a 2022 survey by The Institute of Financial Operations and Leadership (IFOL), 41% of respondents expect to be fully automated in one to three years, reducing and potentially eliminating processing challenges, such as the delays spent processing invoice exceptions and reducing manual data entry, are the main drivers.
Several benefits of automation include:
Faster Invoice Approval: Errors can be detected and corrected before submission. Electronic approval workflows mean routing directly to the approver's inbox.
Electronic/On-Time Payments: Once approval data is recorded, payments can be sent automatically on the authorized date.
Greater Visibility: Finance professionals and suppliers can track invoices and payment status to follow up on any delays in real time.
Accounts Payable and Purchasing Templates
Several common documents and templates are associated with any organization's accounts payable and purchasing process. Even though many organizations are leveraging automation, understanding these key documents is important for reducing organizational risk and mitigating fraud.
Purchase Order
A purchase order is a document issued by the purchaser to the vendor to place an order. It includes the product or service requested, the quantity, the agreed-upon price, and credit terms. When the vendor accepts the purchase order, it becomes legally binding.
The person submitting the purchase order and those involved in the process can vary depending on the needs and size of the organization.
Receipt Report
A receipt report, or a receipt of goods and services report, is confirmation that the product and/or service ordered from the vendor has been acquired. The details on the receipt report must match those on the purchase order that was issued to acquire the goods or services.
Vendor Invoices
The invoice is the bill for the product and/or service that was supplied by the vendor. An invoice can be sent at any time in the accounts payable process. Some vendors issue invoices upon purchase, while others may wait until they have delivered the goods and/or service. When an invoice is received, a key activity is to match the details on the purchase order with that of the receipt report and the vendor invoice — often called a three-way match.
Voucher
A voucher contains the supporting documents for an invoice to show the completeness of the approval process. It may include the purchase order, the receipt report and the vendor invoice. It can also include information on the approval, the amount owed, the due date, the case number and other supporting information.
Accounts Payable and Purchasing Checklist
Using an accounts payable and purchasing checklist can ensure prompt and accurate invoice processing. It is also wise to leverage a checklist as an internal control to check for any errors that may lead to unnecessary expenses.
This checklist can be broken down into three steps: pre-payment, data entry and payment.
Pre-payment
Before making a payment, ensure that you are paying for goods and/or services that were received by your company. Perform or check the following:
- Invoice approval
- Purchase order approval
- Two- or three-way matching
- Duplicate payments
Data Entry
Data entry of invoices is very demanding and prone to errors. After data is entered and recorded, double-check the purchase order and invoice numbers, the invoice amount, the due date, and payment terms.
Payments
To minimize errors in the payment process, consider several steps/actions to take:
Check/Payment Preparation: Have several people involved in preparing and sending the check or electronic payment, such as one person preparing the check while another sends the check. Likewise, similar steps should be taken for electronic payments.
Monitor and Enter Check/Payment Tracking Information: Assign people to track payment progress, including when the vendor deposits the payment.
Store Checks and Record Payment Details: Store any checks in a secure location and ensure that all sensitive information is stored safely.
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