Accounts Payable Best Practices Accounts Payable Best Practices

Manually coding and approving invoices is inefficient and error prone. The irony is this adds additional unnecessary costs to the existing cost of the invoices. One of the most significant investments any business makes other than its human resources is typically its finance system. Unfortunately these manual processes often throttle this highly capable piece of technology. This document seeks to communicate best practices in the AP department and helps businesses to lay the path to automation.

Eliminate the paper shuffling

Paper in its purest form is an inefficient medium. It is easily lost, be that in the mail or in a stack of invoices on the manager’s desk. The start of this century saw major multi-national businesses implementing Electronic Data Interchange (EDI), which eliminates paper altogether.

Basically the servers swap information with each other in a secure environment. However, it is expensive and cumbersome to implement for both the customer and supplier. To date this technology is largely out of reach for the medium business and due to the cost to the supplier for implementation will never be a solution that can be implemented in totality.

With ROI in mind a far more cost effective and just as functional method would be to have invoices either emailed by the supplier to a central mailbox. Where suppliers insist on sending the paper invoice the best thing to do with that piece of paper is to scan it.

Once the documents are in their digital form they may be read and routed through the business for electronic approval. There is no longer a need to walk between offices distributing invoices and, more importantly, chasing those same invoices for approval.

Force process

Let’s face it, most AP departments are run on the knowledge in the heads of the AP staff. In most cases there is great opportunity to establish structured procedures for the department to improve efficiency and reduce risk of lost knowledge when the staff member leaves. As obvious as some of the items below sound, you would be surprised how many AP departments have not implemented them.

Use Purchase Order’s as much as possible

A study into AP found that on average businesses use purchase orders for 51% of their invoices . This means that at least 49% of all invoices need someone to manually approve it as part of their processing. The ideal mix of PO/non-PO invoices depends on business and its purchasing behavior so a ‘best practice’ is almost impossible to provide. Efficient AP departments strive to ensure POs are used as often as possible.

Businesses often site the difficulty of raising a PO as the prime reason for lower PO production. It is not financially feasible to issue a user license for the finance system to everyone, just so they can issue PO’s. One top class ERP license costs so much that only very few selected people have the access to raise POs form their ERPs. Those license’s are expensive to purchase and require both technology and training maintenance.

Further staff cite the delays in having a PO raised as another reason not to use them. ‘I can’t wait 3 days for finance to issue a PO so I do without’, is not an uncommon sentiment in the employee base.

There is a simple answer to this all. Simply publish a form on a webserver, which can be accessed by any browser or even the smartphone, to allow the staff to complete the request for PO and submit it. There are many technology providers in the marketplace (DrGrep being one of them) today that can offer integration with the finance system and armed with this data and an approval matrix PO requisite and approval can be completed in seconds.

Maintain your item ledgers

Those businesses that warehouse or trade in some form of physical product need to maintain their item ID’s in the finance system with more care. It is preferable that the item ID’s in your system match exactly to the vendor list as this will lay the foundation for line item management in the future. Although not always possible it should be the goal.

Vendors will release a price list on a periodic basis. Don’t ignore that price list. Ensure that it is heavily scrutinized and the finance system is updated. Don’t recycle item ID’s! If the packaging on that product changed by 30mL and there is a new item ID, make sure you update it.

Some industries have as many as 7.4% of invoices with errors. Ensuring that your item lists match the vendor is an excellent measure to identify these errors.

Reduce ad-hoc invoice processing

The ultimate goal of forcing processes is to minimize ad-hoc processing. Any time an invoice requires ad-hoc processing the costs to process that invoice skyrocket. Increasing the ratio of PO:non-PO invoices, maintaining better item ID and vendor records and documenting the approvals process will all work towards a business that processes its invoices as efficiently as possible.

Vendor master file

‘Where is that invoice from XYZ Corporation?’

‘I coded it to the XYZ Corporation vendor account. You can’t see it?’

‘Ahh OK, we don’t use that one anymore, these invoices need to be coded to *XYZ Corp 1.’

Sound familiar? Unfortunately this happens a lot more than it ever should. Study found that regardless of the size of the organization, if there are more than 2,000 vendors in the vendor master file there are problems of duplication, wrong information, data mismatch, unavailability of new information. As they say ‘our vendor data is in mess’.

Smaller organizations could have master files that in most cases should not exceed those of hundreds of vendors. Not only does a smaller vendor master file give clarity to where the invoices should be sent, or how many AR invoices are yet to get paid for etc, But it also minimizes the opportunity for double payment of invoices.