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Last updated Nov 12, 2024

How To Master Accounts Payable Management In 6 Steps

Written by Paul Tompsett
8 minute read

Want to see the future of procure-to-pay?

How to master accounts payable management in 6 steps.

22% of AP teams don’t have a formal management strategy in place. Is your AP team one of them?

According to a study by Ardent Partners, only 25% of accounts payable departments have standardized management processes in place to optimize payments. Around 22% have no formal AP strategy, and 59% simply pay on the due date or even later.

A solid AP management strategy that follows best practices opens up cost and time-saving opportunities and improves your company’s financial health.

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What is accounts payable management?

Accounts payable (AP) tracks all of the money a business owes its vendors, suppliers, and service providers. On the surface, AP management seems simple — process invoices and pay bills as they come in. But a non-management approach like this misses out on potential opportunities to increase your cash flow and financial health.

Effective accounts payable management is a complex process with a lot of interconnected moving parts. It integrates with other financial and accounting aspects, including:

  • Budgeting: AP management gives companies the data they need to plan and control financial resources based on outstanding liabilities and expected future payments.
  • Cash flow management: Precise management of outgoing funds balances cash flow and prevents cash shortages.
  • Financial reporting: Accurate, compliant financial statements start with detailed, accurate AP records.

From small businesses to global enterprises, structured AP management is essential for long-term financial stability.

Importance of accounts payable management.

You might think that as long as the bills get paid, it doesn’t really matter how it happens. But effective AP management enhances your cash flow, supplier relationships, and operations workflow.

Average profit margin

Cash flow and working capital.

Strategically timed payments create enough liquidity to meet your immediate needs while optimizing working capital. You also gain accurate insights into your future cash needs for improved financial forecasting and decision-making.

Supplier relationships.

If you asked your employees to wait a couple of weeks for their paychecks, they would be pretty upset with you — but a certain percentage would assume the company is badly managed. That kind of a black mark puts employees closer to jumping ship.

Your suppliers are no different — they expect on-time payment for their services, and they’ll view your company negatively if late payments are the norm. And yet, 41% of buyers regularly accrue late payment fees on vendor payments.

Timely payments increase vendor trust and lead to:

  • Stronger supplier relationships.
  • Better payment terms.
  • Favorable discounts.
  • Preferential treatment.

Operational efficiency.

Nearly three-quarters of finance teams spend up to 520 hours a year on manual AP tasks that the right software can easily automate.

Streamlined, automated AP processes reduce your accounting team’s workload and eliminate a variety of manual tasks — along with the associated human errors. Not only does this increase your operational efficiency but it also frees up your accounts payable department to contribute to strategic initiatives that drive business growth.

41% of buyers regularly accrue late payment fees and nearly three-quarters of finance teams spend up to 520 hours a year on manual AP tasks that the right software can easily automate.

Step-by-step guide to managing accounts payable.

Now that we’ve underscored what AP management can do for your business, let’s look at how to implement an effective strategy using these six steps:

Step 1: Establish a clear AP policy.

AP management starts with a detailed, straightforward AP policy that covers every aspect of the accounts payable process, including:

  • Responsibilities: Clearly outline approval levels, department structure, and who is responsible for what.
  • Approval process: Specify when invoice or purchase order approval is necessary, when it’s not, who has the authority to issue approvals, and what the approval workflow should look like.
  • Invoice process: Detail where to send supplier invoices and how to enter, review, and pay them. Also, cover approved invoice matching methods and how to handle duplicate payments, refunds, and invoice disputes.
  • Payment policies: Cover acceptable forms of payment, preferences concerning early payment discounts, and strategies to minimize late payments.
  • Vendor policies: Identify who is responsible for sourcing vendors and collecting and managing vendor information, as well as criteria for choosing new suppliers.
  • Reconciliation and record retention: Determine who is responsible for AP reconciliation, how often accounts should be reconciled, and how long (and where) records should be stored.

Step 2: Implement a centralized AP system.

A centralized accounts payable system streamlines AP processes, improves accuracy and compliance, and leverages deep insights to manage accounts payable effectively.

Modern AP software solutions like Airbase also include powerful automation capabilities to maximize efficiency and minimize human errors — which leads us to the next step.

Step 3: Automate invoice processing.

With an AP automation platform like Airbase, automated approval workflows are easy to set up and customize. Plus, AI-powered optical character recognition (OCR) technology scans and captures invoice data automatically, minimizing manual data entry and human errors.

Manual errors add around 17 hours a week to AP management times.

Step 4: Set up a vendor portal.

A vendor portal keeps vendors informed, streamlines communication between AP teams and suppliers, and increases supply chain reliability and efficiency. Comprehensive procure-to-pay solutions combine vendor management, accounts payable, and procurement into a single all-in-one platform for seamless operations and enhanced oversight.

Step 5: Schedule payments strategically.

A clear payment schedule is essential but if your only goal is to pay invoices on time and avoid late fees, you might miss out on early payment discounts and other cost-saving opportunities. Instead, prioritize payments based on contract terms and available cash flow.

Ask vendors about bulk or early payment discounts, and take advantage of these savings whenever it makes sense to do so from a cash flow and supply chain perspective.

Step 6: Leverage AP analytics.

AP key performance indicators (KPIs) and metrics show you how well your AP management strategy is working and where it needs improvements. Again, accounting automation tools are essential here, as they compile and analyze the data for you, then generate advanced, customizable reports and deep insights into AP performance.

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Managing accounts payable: Challenges.

No matter the size or industry, businesses face the same challenges when it comes to accounts payable management — all of which are attributable to outdated manual processes.

  • Delayed invoice processing: Slow, tedious manual invoice processing leads to late payments, additional fees, and poor vendor relationships.
  • Time-consuming, error-prone processes: Manual data entry requires more manpower and is prone to errors. In fact, in a recent survey, half of respondents stated that manual errors add around 17 hours a week to their AP management times.
  • Compliance issues: Manual errors and delays lead to compliance issues with both vendor contracts and industry regulatory bodies. AP must also be in compliance with company policies.
  • Lack of scalability: As a business expands its operations and onboards new vendors, manual AP processes become unsustainable, limiting the company’s scalability and flexibility.
  • Strained vendor relationships: Suppliers expect on-time payments. On top of accruing additional fees, late or missed payments can drop you to the bottom of a vendor’s priority list or, worse, cause them to drop you as a customer.

Best practices for managing accounts payable.

98% of companies say that AP automation would improve their payment speed, and 90% also feel it would enhance payment processing visibility and transparency.

Automate accounts payable.

If you’re still using traditional accounting methods, automation will revolutionize your accounts payable processes. Leverage AI and OCR to process invoices and robotic process automation (RPA) to handle repetitive manual tasks like data entry and payment scheduling. Advanced accounts payable automation platforms come with these tools built in for seamless integration.

  • This approach leads to:
  • Reduced processing times.
  • Improved AP efficiency.
  • Better financial decision-making.
  • Lower error rates.
  • Cost savings.

In fact, 98% of companies say that AP automation would improve their payment speed, and 90% also feel it would enhance payment processing visibility and transparency.

Maintain accurate vendor information.

Implementing a vendor portal for simplified supplier management and communication is a game-changer, but the next step is to update vendor information, including contract details, to ensure data accuracy.

Inaccurate or outdated vendor data leads to miscommunications, supply chain disruptions, and misdirected payments.

Ideally, your vendor portal should have self-service capabilities so suppliers can onboard themselves and update their contact information and other details as needed. If you opt for a more hands-on approach, try to minimize the number of people responsible for vendor updates to keep suppliers from slipping through the cracks.

This goes both ways — you also need to keep vendors updated on any company policy changes or new processes that affect your working relationship.

Regularly reconcile accounts payable.

Finally, establish a rigid schedule for AP reconciliations and stick to it.

Routine reconciliation ensures financial accuracy and compliance with vendor contracts and industry regulations, so it’s an essential part of AP management.

The general rule of thumb for AP reconciliation frequency is once a month but it can vary by business and industry. If you’re already stressed out by the thought of monthly reconciliation, don’t be! This is another area where automated accounting software comes in handy.

AP tools like Airbase provide automatic three-way invoice matching for simplified, accurate reconciliation and advanced fraud detection and prevention. Plus, AP automation delivers a clear, consistent audit trail to keep you audit-ready and in compliance.

Integrate AP into broader procurement processes.

AP is part of a larger procurement process and is more effective when it operates within that broader context. For example, the approval workflows that reflect an organization’s expense policies are best when applied consistently, whether that spend originates as a PO, a corporate card, or an expense reimbursement. When AP is also part of an automated intake process, anyone requesting spend is prompted for all required information and documentation needed for the type of purchase they wish to make.

Automated intake also routes those requests to all relevant stakeholders — for example, IT for software compliance, legal for contracts, and procurement for pricing and vendor review.

Summarizing key insights in accounts payable management.

An effective accounts payable management process is critical for continued business growth and financial health from small startup to international corporation. A strong AP strategy optimizes cash flow and working capital, enhances vendor relationships, and improves operational efficiency.

Modern AP teams need modern AP tools with advanced automation and powerful analytics.

A comprehensive AP automation platform like Airbase eliminates manual data entry and processes to deliver seamless, centralized accounts payable management. From vendor management to invoice processing and reconciliation, robust automation breaks down the barriers to effective AP management.

When combined with Airbase’s Guided Procurement, the intake process is also automated so that all stakeholder requirements in the AP process are met. Airbase’s full suite also includes Expense Management and Corporate Cards to complete the full ecosystem of all spend management.

Schedule a demo today and see how powerful AP automation from Airbase can revolutionize your AP management strategy.

FAQ.

What is accounts payable management and why is it important for businesses?

Accounts payable management is the process of tracking and managing outstanding payments to suppliers. Accurate payments maintain good relationships with suppliers, prevent late fees, and ensure effective cash flow management.

What are the main functions and responsibilities under accounts payable management?

  • Tracking and managing all outgoing payments to suppliers for goods or services purchased.
  • Maintaining accurate records for financial reporting.
  • Ensuring timely and accurate payment processing to maintain strong vendor relationships and avoid any late fees or penalties.
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