There are many reasons why
revenue can slip through the cracks of an organization. Common culprits include
outdated technology, lack of training, employee turnover and complacency. Accounts
Payable tends to be the land of the lost – overlooked and underappreciated.
Ignoring best practices in this department leads to lost revenue and exposes
your operation to significant financial risk. Accounts Payable is critical to
capital optimization; it is time to bring this core strategy into the light.
Taking a strategic approach
to Accounts Payable requires a business owner first to identify which practices
are holding up their business. Common mistakes include:
- Onboarding
suppliers without following a standardized procedure
- Duplicating
payments due to workarounds in the ERP system
- Missing the risky
behaviors that expose your business to disbursement fraud
- Taking liberties
with late vendor payments
- Not separating
the duties of new supplier approval from invoice payment
A well-functioning Accounts
Payable department is an opportunity to optimize payables and free up the
working capital needed to fuel growth. Strengthening your accounts payable
department processes and procedures is a big task. Addressing the following
areas first will help build momentum:
- Automated invoice and payment processes. Too often, small businesses use error-prone manual
processes to approve requisitions, scan supplier invoices, and issue payments.
Adopting automated systems will reduce the number and mistakes and increase the
effectiveness of process controls.
- AP Workflow.
Unless you have an AP workflow in place, your ERP system will only act as a
gatekeeper. Without an intentional
workflow, manual loopholes make it possible to outsmart the very systems you
have in place to prevent these mistakes. Setting up a workflow – a series of
checks and balances – will help you avoid these errors before they begin. For example,
- Duplicate Payments. One challenging area for some of our clients are payments to vendors
via check and by credit card. To avoid duplicate payments, we often suggest
requiring PO numbers for payments made by credit card.
- Three-Way Matching. It is always a good idea to confirm that the supplier invoice amount
aligns with the goods or services you have purchased. Failure to do this can
leave your organization susceptible to paying for things you did not order,
receive or approve. To prevent this, consider adopting a three-way matching
approach to your checks and balances. These steps triple check your process for
oversights or mistakes. The three documents you will review are the vendor
invoice, purchase order and receiving document (packing slip or report).
- Airtight Master Files. Take vendor management seriously before an internal audit. Establishing and maintaining a clean
vendor master file will safeguard you against potential fraud. Keeping records and
contracts up-to-date will help you identify red flags and make it easier for
your procurement personnel to do their jobs.
- Proactive Behaviors. Your organization will benefit from a proactive approach, but three
main areas will outshine in the Accounts Payable department.
- Dynamic
discounting produces a risk-free, annualized return on investments, simply by
leveraging payments terms to your advantage. In simplified terms, the
purchasing organization offers to pay their suppliers early in exchange for a
discount. This synergistic approach is dependent on transparent and up-to-date
disbursement systems and works best in organizations that have an efficient AP
workflow.
- On average, fraud
takes 18 months to uncover.In
addition to internal and external audits, businesses need to commit to regular,
rigorous fraud monitoring. Being proactive in this area means establishing
controls that look for red flags such as employee-vendor matches, invoice
anomalies, or prohibited entities in your master list. Aggressive monitoring
should not invoke a culture of distrust; it should instill a core value around
trustworthiness.
- A great byproduct
to careful monitoring is an instinct toward recovery audits. When a department
initiates recovery audits as part of their quarterly review process, they catch
incidents like overpayments and pricing compliance before they require
emergency mitigation.
- A Thriving Team. If members of your accounting team have made a habit of extending
payment cycles or accepting discounts without calculating the costs or neglect to
take advantage of maximum savings through volume rebates, it might be time to
reassess your staffing structure. Reactive accounting will not support your
growth; it will curb your progress. Be sure your AP team knows their value, is adequately
staffed, sufficiently trained, and has the right skillsets for tasks at hand.
Personnel in this department need to have an analytical mind and the tools to
get the job done.
Poor Accounts Payable practices
occur in both emerging and mature businesses. If you need assistance
strengthening your Accounts Payable department process and procedures or would
like to talk about creating a strategy around capital optimization, the
professionals in our office can help! Give us a call today to get started.