How the Accounts Payable Process Works in 6 Basic Steps

You might decide to set up a weekly, bi-weekly or monthly schedule, depending on the number of invoices you receive and your business’ cash flow. Compare the invoice to the purchase order and the receipt to ensure everything matches up. This process is known as a three-way match, and it helps prevent errors and fraud. In this article, we’ll break down the accounts payable process step-by-step and offer some solutions to help streamline your workload. Again, if you only have a few vendors to pay, this may not be an issue, but even if you have to pay just five vendors monthly, your life will be much easier if you use accounting software.

Why is the accounts payable process important?

The AP check run involves the approval and issuance of checks for vendor and other stakeholder payments. These payments often include traditional, physical checks, which 36% of companies still use for more than half of their payments. Check runs are labor and time intensive, therefore they are typically done once a week, or even once every two weeks.

However, if you have multiple bills to pay, you’ll likely add them to accounts payable to be paid at a later date. As a small business owner, you will need to pay attention to the accounts payable cycle and learn the accounts payable process flow. MineralTree can help your team enhance efficiency, reduce fraud risks, and embrace the advantages of both traditional checks and modern digital payment methods. Proper documentation is essential for AP teams because it ensures all financial transactions are accurately recorded and accounted for. Many organizations struggle with outdated and inefficient documentation practices, resulting in costly errors and delays in processing payments.

You’ll also be able to see how much you’ve paid each vendor in any given time frame, which can help tremendously with expense management. If you pay your vendors using a check, you should probably include a copy of the invoice in the envelope along with the check. You will also want to make sure that the invoice number is on any type of remittance in order to ensure your payment is posted properly. Payment fraud attacks are the ‘new normal,’ and advancements in technology have opened the doors for fraudsters. 81% of companies were targets of payments fraud in 2019 alone, while 74% of organizations experienced payment (ACH, wire and check) fraud in 2019–up from 70% in 2018.

1. Many organizations struggle with outdated and inefficient documentation practices, resulting in costly errors and delays in processing payments.
2. If you’re unable to pay an invoice by the supplier’s deadline, typically within 30 days, they may be able to extend the due date.
3. Adding in the accounts payable process is necessary for effective business accounting, but we know it can be time-consuming.
4. With QuickBooks, you can automate expense management and get back to doing the things that you love about running your business.
5. The importance of efficient check runs for accounts payable cannot be overstated.

Step 4. Process payment for outstanding invoices

Once you receive an invoice from a vendor or supplier, you or your accounting clerk need to review the bill for accuracy. This can include things like inventory, raw materials, utilities, rent, and other business related expenses. If you pay using a credit card or ACH, you should notify the vendor of the payment. An AP automation solution like MineralTree enables teams to set controls and automatically route invoice approvals to the appropriate reviewer, expediting approvals. what is the difference between operating and non In instances where a check amount exceeds a certain threshold, require a second person to sign the check.

Step 3: Entering invoices into your accounting system

However, if you employ an accounting clerk, you’ll need to provide that person with general guidelines on invoice approval, as well as perhaps a dollar limit the clerk can approve themselves. If a bill is for products ordered, be sure to verify that the products listed on the invoice have all been received. If the invoice is for services rendered, ensure the services were provided as described on the invoice. Another payment term commonly used, particularly among suppliers, is 2/10 Net 30. Using the same invoice date (December 15), this term means if you pay your invoice by December 24, you can take a 2% discount off of the total amount due.

However, by honing your internal processes and automating certain AP functions, you can maintain smooth operations and ensure timely payments that support vendor relationships. According to the State of AP Report, digital payments continue to grow in prevalence, with most companies planning to further reduce check usage over the course of the year. However, even though many teams now rely on ACH and virtual cards, most companies need a streamlined process for delivering checks. Today, only 6.5% of companies are not using any checks in their payment process.

Whether you use a manual accounting system or accounting software, you’ll need to review due dates to see which invoices need to be paid. Most businesses have these challenges when tracking accounts payable manually. With accounting software, you can track expenses to ensure your accounts payable process is more accurate. An efficient accounts payable process helps you maintain positive relationships with your suppliers and avoid late fees and penalties. It also ensures you have enough cash flow to meet your other financial obligations. You’ll never have to look up a vendor or supplier address, check on payment terms, or even hand-write checks.

One copy of the purchase order will be used in the three-way match, which we will discuss later. With plans starting at $15 a month, FreshBooks is well-suited for freelancers, solopreneurs, and small-business owners alike. A purchase order gives both you and the seller a clear understanding of what is being bought and the terms of the transaction. Ready to make your AP check run a seamless and strategic part of your financial operations?

Simplify your accounts payable process

For this example, let’s pretend you own a restaurant and you want to order fresh tomatoes from a local food supplier. Keeping your accounts payable organized and in check helps you maintain accurate records in case of a tax or business audit. Review your accounts payable weekly to ensure there are no outstanding payments and to confirm you completed the payment. At Business.org, our research is meant to offer general product and service recommendations. We don’t guarantee that our suggestions will work best for each individual or business, so consider your unique needs when choosing products and services. Common payment terms include Net-30 and Net-60, which gives you 30 or 60 days to pay after receiving the invoice.

You may have a designated accounts payable department that handles AP, it may fall under general bookkeeping and accounting duties, or you may opt for AP automation. The accounts payable process doesn’t have to be a dreaded task when you habitually review your invoices weekly and implement accounting automation opportunities. Before initiating payment, you’ll want to review your invoice for accuracy and ensure you’ve received the product or service requested.

Periodically companies should seek professional assistance to improve its internal controls. Cash and checks – In addition to daily deposits, all check/cash receipts should be listed by someone with no recordkeeping responsibilties for more control. If there are any discrepancies, you should contact the vendor or supplier to resolve the issue. At many small businesses, the business owner or a member of their team is responsible for managing the AP process. MineralTree is the owner of all intellectual property rights for MineralTree TotalAP and MineralTree TotalPay. Intellectual property rights to the other products are held by their respective owners.

You can automate reconciliation with accounting software to ensure you’re paying vendors on time to avoid late fees. Xero is cloud-based accounting software that offers features for each stage of the accounts payable cycle, including bill payment, purchase order creation, expense tracking, and more. No one wants to be audited, but if you ever are, you’ll have a solid audit trail using accounting solve your irs tax problems bbb ‘a+’ rated tax debt relief software, from initial approval to the final bill payment process. You’ll also be able to generate more accurate financial statements, a must if you’re applying for credit or looking for investors. No more pulling out the checkbook to write checks and then record them for your records. If you use accounting software, you can enter invoice details, the amount due, and the date due, and choose to pay those invoices when the payment is due.

One workflow enables teams to easily pay vendors in their preferred format, whether that be a virtual card, check, or ACH. Even if your business prefers checks over digital payment methods, there are ways to modernize your documentation processes. An AP automation solution like MineralTree can help further reduce the risk of fraud through positive pay files. When a business sends a check, a file is sent to the bank with the payment details. If something deviates from the positive pay file, banks know that some sort of fraud was attempted. Vendors often send statements to their customers to indicate the amounts (listed by invoice number) that remain unpaid.