Many or all of the products and brands we promote and feature including our ‘Partner Spotlights’ are from our partners who compensate us. However, this does not influence our editorial opinion found in articles, reviews and our ‘Best’ tables. Our opinion is our own. Read more on our methodology here.
Jump to
- What is accounts payable?
- How can automating accounts payable help my business?
- How does accounts payable work?
- What types of accounts payable systems are there?
- How much does an accounts payable system cost?
- What are the advantages of an accounts payable system?
- What are the disadvantages of an accounts payable system?
If you buy goods or services from suppliers, accounts payable will be part of the day-to-day running of your business.
The term ‘accounts payable’ is an umbrella term for the processes and software you use, as well as the team members responsible for placing orders, managing invoices and paying suppliers.
Traditionally, the accounts payable process was conducted using entirely manual methods: sending purchase orders (POs), receiving paper invoices, and then keeping track of, reviewing and approving those invoices.
While some people still use these manual methods, others are turning to an automated solution, which some believe is a more efficient and accurate way to run your accounts payable process.
Below, we explore how the accounts payable process works, the different solutions available to businesses, and the costs, pros and cons, of using an automated system.
What is accounts payable?
Accounts payable (AP) refers to all the bills that you have yet to settle with your suppliers. For example, if you purchase materials on credit or you have an unpaid energy bill, the outstanding amount for those goods and services is part of your accounts payable.
Accounts payable can also refer to the individual or team within your organisation that’s responsible for settling these invoices, and to the process of placing and paying for orders with suppliers. Accounts receivable refers to those waiting to be paid after having provided the service or supplied the goods.
How can automating accounts payable help my business?
The accounts payable process involves placing orders, agreeing payment terms, approving invoices, record keeping, and making payments.
It is, of course, possible for someone to manage the entire process using manual methods, but automating the accounts payable process using dedicated software or an accounting solution has many advantages and can help your business in the following ways:
Manage your cash flow
Automated AP systems give you full visibility over your outstanding bills and available funds, and can produce insightful reports that can help you keep track of your cash flow. A well-organised accounts payable process is important for effective cash-flow management, as it ensures you have enough liquidity to pay your bills on time.
Make your business more efficient
An AP system streamlines your operations by allowing you to automatically submit invoice data to only those who have the relevant permissions to approve the payment. Then, rather than having to chase approvals, you can quickly check the status of each invoice, see who is responsible for approving it, and identify blockages, which is much more efficient.
Speed up the invoice process
Automated AP solutions utilise optical character recognition (OCR) to scan and capture details from invoices, meaning you don’t have to manually enter them into your accounting software, which is both time-consuming and, potentially, inaccurate. They can then match the invoice to the relevant PO, so you can keep track of the status of each invoice and ensure it’s moving quickly through the approval process.
Avoid late payments and charges
By doing away with manual processes that are prone to human error, you avoid delays and can more easily keep track of which payments have been made and which are outstanding. AP systems also make it easier to search for specific invoices, so you can’t misplace them as you might with their paper equivalent. An efficient, streamlined and transparent AP process makes it much easier to pay your invoices on time, allowing you to avoid late payment penalties, which can really add up if you consistently miss deadlines.
Improve supplier relationships
Promptly paid invoices result in happier suppliers and longer-lasting, productive business relationships.
How does accounts payable work?
Here’s how the accounts payable process works from start to finish:
- Place an order: After reviewing quotes and choosing what you need, you place an order from a supplier. Every order should have an associated PO number.
- Receive and approve the invoice: Your supplier will send an invoice, which should include the PO number, to your dedicated email address. These can be automatically scanned by your accounting software. If you don’t have software, you should still review the invoice to ensure that it’s accurate. In particular, check that the amount owed, payment terms, and business details for both you and your supplier are correct.
- Keep records: Once you’ve checked the invoice, you can record the amount you owe as a current liability on your balance sheet, as well as when it must be paid by. You should save a copy of the invoice in your records. If you use accrual-based accounting, you should record the expense in your accounts now. If you use cash-based accounting, you’ll record it after you’ve made the payment.
- Schedule payments: You can now schedule the payment according to the terms agreed with your supplier, which could be at the time of month when you have sufficient cash reserves to cover it. You can use your accounting software to schedule the payment, which will then be automatically included in your cash-flow forecast.
- Make payments: When the day comes, your accounting software can automatically execute the payment. Alternatively, you can set a reminder to make the payment yourself on the agreed date. The amount is no longer part of your accounts payable and, if you’re using cash-based accounting, can be added to your ledger.
What types of accounts payable systems are there?
Accounts payable systems include Enterprise Resource Planning (ERP) software, cloud-based accounting software, and dedicated accounts payable solutions that can be integrated with other software.
- ERP software: ERP platforms, are comprehensive business management solutions that offer AP functions alongside other features such as customer relationship management (CRM), inventory management, and analytics.
- Cloud-based accounting software: some accounting software providers function as AP solutions by providing features such as invoice automation and management, payments, and bookkeeping.
- AP system: Dedicated accounts payable solutions automate the AP process with functions like OCR, reconciliation reports, and mass payments. They can integrate with accounting platforms too.
» COMPARE: Accounting software providers
How much does an accounts payable system cost?
The cost of your accounts payable system will depend on whether you’ve opted for a comprehensive ERP solution with AP functions together with a full suite of related features; an accounting software provider which facilitates invoice automation and management; or a dedicated AP solution which can be integrated into other tools. .
Depending on what they provide, dedicated AP solutions can cost well over £100 a month while accounting software providers are typically cheaper than other solutions but you’ll need to make sure the plan you choose includes the features you need.
Some accounting software providers offer additional integrations to streamline the accounts payable process for small businesses. Integrated AP software can automate invoices, as well as handling remittances, tax calculations and supplier management.
What are the advantages of an accounts payable system?
The advantages of an accounts payable system are:
- Reduce human error: OCR and automated data capture avoids common human errors that can occur during manual data entry like mistyping important details
- Fight fraud: By setting permissions, you can control who has access to the sensitive financial information contained in invoices, and you can build multiple approvals into your AP process to ensure comprehensive oversight
- Save time: Tools such as automatic reminders and automated processing can result in significant time savings
- Simplify tax and compliance: By automatically matching POs with invoices, linking all associated communications and documents, and creating a searchable digital audit trail, AP systems make it easy to comply with quarterly or annual tax requirements
What are the disadvantages of an accounts payable system?
However, there are also some downsides to using an accounts payable system, including:
- Implementation and running costs: Despite the time and cost savings an AP system can provide, you will typically have to pay a monthly fee for the use of the system. You should also factor in the potential impact of downtime on your revenue during implementation and training your staff.
- Technical issues: You will certainly save time over inefficient manual processes, but, inevitably, you will also have to deal with technical issues, bugs or disruptions caused by server downtime.
- Lack of integration with supplier systems: Even if all your suppliers are also using AP systems, they may be using solutions that rely on completely different software, invoicing formats, and processes to function. Adapting your own processes to these variations can create frustration and delays.
- Resistance from employees: Even if you can demonstrate to your employees that an automated AP system will save them time and effort, new processes are not always welcome. Staff may be reluctant to learn to use complicated new software and uncertain about how it might impact their role.
Image source: Getty Images
About the Author
Dive even deeper
How to Choose a Company Structure and Register a Business
by George Harrison
How Balance Transfer Business Credit Cards Work
