Accounts payable is an essential component of any small business’s accounting processes. Your business’s accounts payable department maintains a record of all the money you owe to suppliers and other creditors. A well-functioning accounts payable department will help you ensure that you pay any money you owe to other individuals or businesses as promptly as possible and in line with any payment arrangements, you might have with individual creditors.
For many small businesses, the accounts receivable department consists of a single person for whom accounting might be just one of several duties they perform. However, it’s never too early to start thinking about how your business will manage its accounts receivable. One person might be enough while your business is relatively small, but as it grows, so will your needs. By getting all your accounts receivable processes and policies in order now, you can save yourself a lot of trouble further down the line when you have more to manage. The tips below are all geared toward small businesses, but they will prove invaluable throughout your company’s growth journey.
1. Start automating
As a small business with relatively few accounts to keep track of, forking out cash for accounting software might seem like an unnecessary expense. However, even if you are doing just fine without it, there are still a couple of reasons it’s worth the cost.
First and foremost, if you pick the right software now, you can end up with something that will stay with your business as it grows and serve you well long into the future. Most business accounting software today is available on a subscription basis and provided as a cloud-based SaaS. That means you can adjust your subscription as your business grows, adding new features and capabilities on an opt-in basis. It’s hard to overstate the value of this continuity and the potential long-term savings you could enjoy as a result.
Aside from the benefits of continuity, automated systems are more efficient and less error-prone than humans. Even a small mistake in your accounts receivable department can have big ramifications if it means that you’re late paying a supplier or, worse, you submit inaccurate data when you file your taxes. It’s easy to overlook the possibility of financial and other repercussions of errors that your staff make when they aren’t making any. Unfortunately, no one is perfect; someone in your accounts receivable team will make an error eventually. As the volume of invoices they have to process increases, so do the chances of human error rearing its ugly head. Introducing automated accounts payable processes now means you can keep your lifetime error rate as low as possible.
Finally, using software automation to manage your accounts payable will free up your staff and enable them to use their time more efficiently. Your entire business will benefit from the inevitable increases in productivity that will result.
2. Transition to a paperless workflow
Going paperless isn’t just about saving trees, although that is a fortunate side effect. Every paper invoice you process is costing you time and money, removing them from the equation will save both. Digital invoices are much quicker and easier to process, and they will help you get the maximum possible benefit from your new automated systems. Like automation, a paperless approach to your accounts payable processes will minimise or eliminate unnecessary work for your staff.
Not only is a digitised workflow more reliable and efficient, but it also means you can get rid of bulky filing cabinets and use other storage space more effectively. As your business grows, finding space for all the documents you need to retain for your records can present a serious logistical challenge.
3. Establish a regular auditing schedule
Using an automated digital workflow to process your accounts payable will go a long way to minimising the potential for errors, but no system is perfect. Remember, even a seemingly small mistake in your accounts payable can have much larger ramifications when it comes to your financial reporting, not to mention your day-to-day planning. One of the reasons accounts payable is so important is because it lets you see how much cash you have available to spend after you account for the portion of it you owe to your creditors. Errors in your accounts payable can give you a false picture of your current cash flow. It’s also important to spot errors as early as possible so you can determine whether they are a one-off occurrence or the result of improperly configured software.
Ideally, your workflow should include safeguards that prevent simple errors, like numbers being input incorrectly by a person. Good accounting software can alert you to any potentially fraudulent invoices and flag up anything suspicious for a manual review. However, these systems are designed to identify fraud; they won’t help you catch accidental errors.
Fortunately, while your business is still relatively small, it should be fairly simple to carry out regular account reconciliations, along with a more detailed annual audit. Many small business owners think this kind of accounting work is something for larger businesses with dedicated accounting teams. However, while a detailed audit of your company accounts might require a professional accountant, ensuring that your accounts payable are accurate is something that most business owners should be able to handle themselves. Most accounting software will include features designed to make it easier for you to do day-to-day auditing and reconciliation on your own so you can maintain an accurate picture of your current cash flow.
4. Prepare your team for growth
Even the healthiest and most successful small business will collapse under its own weight if it tries to expand too fast. The accounting processes and workflows that work just fine for small businesses won’t necessarily hold when the volume of trade is much higher. If you think your business is growing at a steady rate and an expansion in the near to mid-term looks likely, you should prepare your accounts payable team accordingly.
The Accounts Payable Association offers a range of courses and certifications that can not only provide your staff with the training they need to operate in line with prevailing industry best practices, but also enable your business to signal to future creditors that you take accounts payable seriously. Whether you’re approaching a new supplier or an investor, APA certification signals that yours is a business that stays on top of its accounts and settles debts reliably.
Cash flow is particularly important to small businesses and startups. An accurate and reliable system of monitoring accounts payable gives you a clear picture of your income and expenditure, enabling better business decisions to be made.
Accounts payable includes all of your company’s expenses, except for the payroll. This is why it’s important for SMEs to handle this vital component of your business’s finances efficiently.
What does accounts payable mean?
Accounts payable describes the bills that a business has to pay. Everything bar payroll falls under this category, making it a critical aspect of your business. As a new business, you may have to purchase items such as staff uniforms, office supplies, or cleaning services for your premises.
There are three basic steps to accounts payable: purchasing the goods or services, receiving your order, and paying your supplier. Once your business starts getting established, there will be ongoing regular expenses that will be dealt with by accounts payable.
The accuracy and completeness of any business’s financial statements depend on the accounts payable process. It will affect the business’s credit rating, cash position, and ongoing relationship with its suppliers.
This is why SMEs need to implement a dependable accounts payable system to produce the accurate financial information required to plan for the future. Putting it simply, without an accurate accounts payable system, your business could end up in trouble if you don’t keep up to date with your debts to suppliers.
What are some examples of accounts payable?
An example of accounts payable is cleaning services when your company hires an outside company to handle the cleaning of your business premises. This will be a regular service, so you will need to budget for the payments in your income and expenditure data. Sending regular payments to the vendor assures prompt and reliable service.
Staff uniforms are another example of accounts payable. If you commission another company to create your staff uniforms, this process can be set up through accounts payable. While there will be a one-off payment if you’re a new business, there will also be ongoing invoices when you hire a new employee or need to replace existing uniforms because they are becoming damaged with wear.
Office supplies are another key example of what accounts payable handles. Again, there will be a one-off purchase if you are a new startup or small business, with ongoing expenses for further office supplies on a regular basis.
Many companies buy office supplies in bulk to ensure they are never in a situation where they are running out of supplies. Buying in bulk can also help keep costs down. Accounts payable enables you to have automatic orders set up on your account. Base them on the average frequency when the vendors are used.
Finally, many businesses pay to have their waste and recyclable materials hauled away. These services are usually weekly and can also be budgeted into accounts payable.
Using accounts payable efficiently means all bills will be paid on time, you will have an effective system of query management in place and you will not end up in a situation where bills haven’t been paid and your credit is limited due to debts.
All of this is particularly important to a new business, as your reputation and creditworthiness are crucial to ensure you can purchase the supplies and services you need to keep your company afloat.
How do you track accounts payable?
Tracking accounts payable is something many small businesses do on a monthly basis. As the business grows, it’s commonplace to track finances on a weekly basis.
It is preferable to make it a weekly task to benefit from early payment discounts. Also, it’s easier to resolve any credits promptly as a result of inventory returns. Businesses should always keep a record of accounts payable in case there are any disputes over payments.
An automated accounts payable system is the preferred choice of many businesses. It utilises staff resources more efficiently when employees don’t have to input the data manually. In addition, an automated AP system can be more accurate, as it cuts out the risk of human error.
Tracking AP weekly reminds businesses of current and outstanding invoices. It also provides proof of expenditure when it’s time to complete your tax returns. You can keep the records manually or with the latest automated software.
Is accounts payable complicated?
While working with accounts payable requires attention to detail, it need not be a complicated process. Invoices should be checked and verified for accuracy and the billing date and payment date should be confirmed. If you carry out accounts payable manually, the figures must be entered accurately in the ledger.
If you use software, often it has the capability of uploading an invoice by scanning it, minimising the risks of entering incorrect data. As a new business, setting up your accounts payable and ensuring the process runs smoothly is the key to running your business efficiently.
You should always work from the original invoice when possible. For those that have been sent electronically, it is still necessary to check them for mistakes before you upload them onto your system. Some businesses print an email to keep in a physical filing system and then store the email in the relevant online folder too.
While each vendor will have its own system of invoicing, you should always assign the invoice number in your system in a consistent manner. Determine the method you’re going to use and stick to it to avoid confusion later.
Enter each invoice individually, including inputting multiple monthly invoices from every supplier separately. There are no shortcuts when it comes to invoices. When you do it properly, you will be able to track down one invoice quickly and easily in the event of a dispute.
Have an appropriate person check and approve each invoice before they are uploaded onto the accounts payable system. Ideally, the person who approves the invoices should be separate from the person who enters the data onto the system. If one person does both tasks, there is greater scope for error.
If you’re a sole trader and you do your own bookkeeping, this may not be possible. You need to have either a clear process for approval and data entry or employ the services of an accountant on a part-time (or “as and when needed” to double-check the figures).
As a small business, if you typically work with accounts payable only once a month, utilise a system whereby you identify early payment discounts as soon as each invoice is received. Don’t just put all invoices in a monthly pile – read them thoroughly to avoid missing out.
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Businesses are facing huge challenges as a result of the troubled economy. Inflation has reached a 41-year high of 11.1% and the Bank of England is warning of a long recession looming. As a result, businesses are increasingly automating their accounts payable process to increase efficiency going into 2023.
Surveys have revealed CEOs’ main goals are digitisation, growth and efficiency. All three are directly connected in post-pandemic Britain as businesses streamline processes to utilise limited resources most effectively.
The current economic climate, combined with businesses still dealing with the impact of Covid, has led to the adoption of digital technologies speeding up by at least three years, according to research.
Read on to find out about the top accounts payable trends for 2023 that are aimed at preparing your AP team for survival in the mid-term and success in the longer term.
1. Paperless processing
In an era where digital transformation has been rapid, businesses are set to further replace time-consuming manual activities and paper documents with electronic accounts payable processes. Around 50% of organisations surveyed are already using Optical Character Recognition technology to read documents in the processing queue.
In addition, more than half of respondents are using an electronic invoice matching system to support AP processes. Only 15% of businesses are using artificial intelligence-based cognitive automation and 36% use rules-based robotic process automation on data-related tasks.
The indications are these numbers will increase in 2023, which is good news for the 50% of organisations that are still “pen-pushing” in the accounts department.
2. Changes in productivity and costs
The significant increase in process efficiency in accounts payable suggests the general cost of operations will be driven down in 2023. However, on a more cautious note, these savings are likely to be offset by rising labour costs and a general shortage of talent.
Digital accounts payable technology has become more affordable and accessible for companies of all sizes in recent years. Studies into invoice processing efficiency between 2019 and 2022 reveal that productivity has increased by an average of 7% during the past three years.
The data shows organisations across the board have become more efficient and productive since 2019. This is “almost certainly” down to the digital transformation, according to analysts.
The impact has been greater in low and medium-performing organisations. Processing efficiency increased by 28.6% and 16.6% respectively in these performer levels. This is because typically, these organisations use fewer employees to carry out the related transactional activity.
3. Impact of the “Great Resignation”
The impact of the “Great Resignation” will continue to be felt in AP departments. It describes an economic phenomenon whereby employees are considering quitting their job.
It began early in 2021, in the immediate aftermath of the Covid-19 pandemic and lockdowns. Significant social and economic changes impacted people all over the world and thousands decided it was a good time for a career change. The main reasons included salary stagnation and the rising cost of living.
The latest figures show 40% of workers are considering resigning from their jobs. An increase in labour costs is being driven by the talent shortages and employee retention problems that have prevailed recently.
The Great Resignation has specifically impacted accounts payable costs, where salaries have increased by 20% for a senior AP clerk between 2019 and 2022 as companies strive to attract the best talent. Companies trying to get a handle on costs during the anticipated recession will be looking towards more automation to try and save money.
4. Better forward planning
Accounts Payable has already seen tremendous changes since 2019 in terms of costs, but because it is a key process for every business, it must work effectively. People tend not to notice AP when it’s working well, but if it stops working, they will certainly notice the difference and everyone will know about it.
According to research, only around 30% of digital transformations in the accounts payable department are completely successful. This is because many organisations are rushing into it without having formulated a clear idea of how it will work.
Those taking the plunge in 2023 must make sure they have the correct processes in place to make it work efficiently, saving the business money and making it more sustainable. Those who miss the mark may experience a negative impact until they get it right.
5. More businesses will be outsourcing
Research suggests there will be an increase in accounts payable outsourcing in 2023. Many successful financial organisations have started outsourcing as part of their operating model.
The Deloitte CFO Signals survey reveals 34% of finance executives have indicated they are likely to increase outsourcing over the next 12 months in their day-to-day operations.
A top outsourcing firm will do accounts payable transactions for a living. They can do more than just perform the tasks and provide the talent. They are also experts at optimising processes to ensure the highest levels of efficiency and productivity.
They are the experts in implementing digital technology, removing the risks from these initiatives. If you have outsourced your AP activities to a professional consultancy, they should guarantee the outcomes when it comes to the delivery of your expected cost savings and ROI.
When you achieve better results for your transactional activities through outsourcing, this should lower your costs and improve your operational efficiency. It will enable you to focus on the key digital transformation projects that are the core of your business.
The idea is to allocate the resources previously swallowed up in administrative tasks into other parts of the business. By working with a professional AP provider, you can also overcome challenges such as different time zones and geographic proximity, language barriers and communication challenges.
Conclusion
The Great Resignation and the digital transformation will continue to impact the world as we know it during 2023. Forward-thinking finance executives will overcome these challenges by incorporating digitisation and outsourcing into their operating model to solve talent shortages and labour costs.
Once you have improved operational performance and productivity, this will enable you to start working on the goals of growth, further digitisation and efficiency.
The role of accounts payable staff has changed significantly over the past two decades as technology has continued to play an ever-increasing part in day-to-day duties. Today, AP employees are more likely to spend their time working at a computer, rather than chasing up paper invoices.
As more aspects of AP processes are taken over by technology, the question is, what is the future of accounts payable? What role will accountants and AP employees play in the next ten to 20 years? Will the processes become completely automated?
Read on to find out how the future of AP may play out, and how to prepare for it.
Artificial intelligence
Machine learning technology and artificial intelligence are assisting people and managing processes in almost every aspect of the corporate world, including AP. In fact, the growth of technology in the business world is having the most significant influence on the future of AP.
In the financial sector, professionals are growing accustomed to the fact that accounts payable automation isn’t a luxury reserved for larger companies with equally large budgets.
With cost-effective tools available, even small to medium-sized businesses can access the same features. Automatic approval reminders, invoice capture and code are some of the services that automation tools can provide for enterprises.
Making the move to AP automation has the opportunity to reduce costs and improve the department’s efficiency. This can potentially make the accounts payable team a more strategic and data-driven body.
Challenging security threats
As digital storage continues to gain ground, many experts predict security threats will reduce significantly. Limiting access to critical files and using cloud storage can minimise the risks of fraud and other security threats, as long as the correct controls are put in place.
Accounts payable will need to keep on top of the ever-changing environment and keep up to speed with new security threats. Best practices should include performing daily bank reconciliations, so any unusual activities can be spotted as soon as possible.
The communications medium will minimise the risk of sensitive information falling into the wrong hands by establishing more secure communication channels with the vendor supplier.
Because the AP team will have access to more data in real-time, it is likely to be the first to notice if something is wrong. This will give the accounting department the chance to assist businesses and the IT team in navigating the digital financial landscape and supporting improved security efforts.
Advisory role
The advances in AP automation will provide businesses with greater access to performance indicators, such as the processing time of invoices. In addition, accounts payable will gain access to real-time indicators of business performance, including account reconciliation, the history of payments, and cash flow.
If the reports are automated, or almost fully automated, accounts payable professionals won’t need to spend hours developing reports. Their role will change into a more advisory one. They will be responsible for explaining to business stakeholders what the reports mean and making recommendations about improving business health and cash flow.
It is predicted that AP automation can help businesses manage cash better, optimise performance, control spending, and mitigate risks in ways that weren’t possible in the past. The next question is what the AP department might look like, ten years from now.
Less manual data entry
As technology advances, data will flow automatically from systems and clients into AP automation software. It could even flow into real-time reports. This means there will be a reduction in manual data entry. Considering manual entry is more prone to errors, this is likely to become a thing of the past.
Accounts payable professionals will be able to focus more on strategic tasks, rather than spending time on tedious tasks and businesses will have access to more insights, enabling them to grow without taking on additional AP staff.
Some aspects of the AP team’s work are already managed digitally. For example, the query management system is in the form of an online database to register customers’ queries and complaints.
In the future, most AP tasks, such as calculating and distributing internal reimbursement payments and sales tax exemption certificates, could all be managed by an automated system. This would further reduce AP employees’ manual workload.
Automatic alerts
Accounts payable automation offers a wide range of alerts and notifications, including reminding decision-makers to approve an invoice for example. In the future, accountants are likely to have real-time access to a much wider range of data, including financial information about their own company, or about their clients.
On receiving these alerts, AP employees will be able to flag up issues, including invoice fraud, earlier in the process. They will also be able to gain a more accurate picture of the business’s overall health.
Proactive vs reactive
Having real-time reports as part of an automated system will permit AP teams to become proactive rather than reactive when it comes to problem-solving. Employees will no longer be waiting for paper invoices to fall onto their desks. Instead, they will be able to log into the digital system to find out what’s holding up a payment.
Problem solving will also be proactive rather than reactive, thanks to employees being able to see potential issues in real-time, preventing them from becoming significant problems. For example, if a dip in cash flow is projected, AP employees can make a proactive decision on freeing up cash for necessities, such as investing in new equipment.
More strategic role
Accounts payable is likely to play a more strategic role in the future, as the department becomes more streamlined and digital, involving less physical paperwork.
It will be unlikely to lead to the complete automation of AP. Instead, the department’s employees will have more time to analyse data, ensure the appropriate controls are in place, and look for growth opportunities.
Preparing AP for the future
There’s no magical formula to prepare your AP department for the future. However, there are some steps you can take to ease into new methods of working. Diversify employees’ skills as the work becomes more digital and less based on paperwork.
Future training areas for AP managers and employees could include data and business analytics, cloud storage and other technology, data security, online security, and handling payment-related inquiries.
With invoices uploaded automatically into the AP system and sent to the relevant person for approval, AP employees will have direct access digitally to the invoice management information they require. They will be able to focus more on building relationships with business stakeholders.
AP professionals should be willing to learn new technology skills to prepare them to become strategic partners. The Accounts Payable Association is here to help your business take the leap into AP automation. Subscribe for all the latest industry news and information.