Strategic Approaches to Optimize Accounts Payable Management
Today’s business climate has become so diverse that organizations are in search of innovative ways to do more with less. They cannot afford to miss opportunities to free up their workforce and capital to focus on key business processes.
By providing greater flexibility to an organization’s balance sheet through an optimized and innovative accounts payable (AP) workflow and AP management approach, users can experience enhanced process efficiency that catalyzes growth, streamlines cash flow management, reduces costs, boosts service levels, and equips organizations to seize opportunities to increase productivity.
While numerous approaches exist that can add strategic and operational benefits to optimize AP, this article focuses on the most impactful strategies to transform AP processing.
Accounts Payable Optimization: A Brief Rundown
Historically, AP has been considered more of a backoffice function focused on managing a company’s liabilities incurred as a result of goods and services purchased and invoices received, rather than as a major contributor to a company’s cash flow strategy and working capital.
To optimize an organization’s working capital, businesses need to develop a robust strategy to address their liabilities which can provide benefits such as improved vendor relationships, additional cash discounts, more accurate cash flow forecasting and liquidity, faster ROI, and stronger negotiating power to achieve extended payment terms and warranty periods.
Companies tend to follow one of two primary approaches to manage cash flow and liquidity through AP: maximize cash flow by paying invoices on the due date or take advantage of early pay discounts to reduce the outflow of cash. Based on the overall business strategy and working capital requirements, companies may choose either approach or may follow a hybrid strategy based on factors such as type of invoice, specific vendors, invoice amounts, etc. The important part is to have a well-defined strategy that is consistently followed.
To determine and implement the best cash management strategy and supporting AP processes, businesses need to include all departments involved in the procurement, payment and financial posting of goods and services including procurement, corporate accounting, warehouse receiving, inventory and others to ensure invoices are received, processed, paid and posted in a manner consistent with the strategy.
Strategies for Optimizing Accounts Payable Processing
1. Derive a Business-appropriate AP Process:
Developing and implementing a robust and systematic cash flow management strategy provides better visibility to the level of AP processing efficiency. This is the first step towards optimizing AP to enable an organization to yield benefits faster.
As mentioned above, the strategy should involve all areas of AP processing including invoice entry (manual or automated), validation and approvals, exception handling, and so on. This inclusive approach enables businesses to fully understand the AP process flow and align it to the corporate cash management strategy.
Businesses should have a clear roadmap that defines the AP process flow, including critical contact points and handoffs. Having this knowledge enables businesses to gain strategic and operational advantages through better organizational and operational controls across their financial management cycle. However, executing an optimized, streamlined workflow aligned to the strategy is difficult to execute with manual processes. Adopting extensible AP solutions that can automate the processes and intelligently yield the expected results helps. In such scenarios, businesses should choose the best automated AP solution that aligns with their strategy, addresses compliance requirements and adapts to business complexities.
2. Establish a Periodic Contractual Review Process:
In order to prevent payment of erroneous and fraudulent invoices which can result in financial loss due to duplicate and overpayments, businesses should establish a regular contractual review cadence. Two common approaches for these reviews are manually through assigned tasks or dedicated teams, or through the use of an automated invoice processing system that can meet compliance and standards much faster and more efficiently than manual processes.
The team or system must periodically review the vendor SLAs against the agreed-upon contractual terms. Use of a vendor scorecard is a best practice to monitor performance parameters such as timely delivery, completeness of orders, quality of product and services, etc. The vendor scorecard should be periodically reviewed with the vendor so that any needed changes can be made. This open feedback loop helps to preserve the vendor relationship.
The contractual review process can also help to track AP days outstanding which is one indicator as to how well the organization is managing cash flow and what, if any, mismatches or deficiencies exist so that the business can mitigate the issues and meet its financial goals.
3. Leverage AP Automation Solutions:
Unlike the AP process cycle of companies with a limited number of suppliers, business with hundreds of vendors often find it difficult to keep track of all the invoices and process each invoice in a timely manner while maintaining quality and adhering to compliance requirements. Many times, companies that rely on manual processes fail to accurately track, forecast, pay and archive invoices.
For companies with a large number of invoices, the AP team is at risk of approving payments to unapproved vendors, approving duplicate invoices or approving invoices that do not comply with corporate purchasing contracts which results in overspending. But having an intelligent, automated AP system in place helps businesses eliminate process complexities regardless of the volume of invoices. Also, adopting automation fueled by AI and ML further helps companies reduce their error rates by automatically matching and analyzing each invoice against the corresponding PO and receipt.
In addition, intelligent AP solutions work hand-in-hand with the finance and procurement departments to optimize the process, enabling companies to secure early discounts and rebates, and track the percentage of discounts captured based on the contracts.
4. Streamlined Invoice Processing:
A streamlined invoice process is yet another way to boost the efficiency of the AP team. To achieve such an orderly, yet consistent, AP process cycle, a centralized control hub capable of monitoring, tracking, and measuring the end-to-end process is inevitable.
With a streamlined AP process in place, the finance team can easily evaluate each level and step of the process to expose issues early in the process and quickly route them back to the supplier with minimal impact to the normal process flow. Above that, this approach helps businesses conduct a review of aging invoices and take the appropriate follow-up actions as well as create direct contact channels for invoice exception handling.
Though such a perfect process flow is not typically possible through manual efforts, an automated AP processing system can make it possible, along with optimizing the entire AP cycle. It not only offers vendors the freedom to submit invoices in a format convenient for them, but it also simplifies data capture, reduces the risk of errors, validates invoices against the POs and archives them. Thus, an automated AP system can streamline the process flow and improve all aspects of AP process efficiency.
In short, having a cutting-edge strategic approach alone does not solve the challenges associated with invoice processing. Businesses must adapt to the ever-evolving tech-driven solutions to realize the potential of advanced strategies and optimized AP management.