Optimizing Accounts Payable (AP) Processes to Free up Cash

Jennifer Phan from The Poirier Group

"Processing invoices may seem quite simple and easy from receiving the invoice to issuing payment. However, there are often many manual tasks that are performed behind the scenes. These manual tasks include invoice data entry, scanning invoices, following up with approvals, providing payment updates/remittances and mailing cheques which often causes bottlenecks."

Why is optimizing AP processes so important for a company’s ability to free up cash and strengthen its working capital?

Optimizing AP processes is often not on many organizations’ list of priorities. As it is a back-office function, the importance of improving AP processes is often overlooked. In theory, if a business simply delays invoice payments to the last possible date, this will allow the business to have more cash on hand to maximize free cash flow. However, with this approach, the business will put themselves at risk of service/delivery delays, late payment charges, and will build a poor relationship with suppliers which will indirectly impact the business down the road.

Businesses need to optimize AP processes as it will help free up cash and strengthen working capital. If optimized, this will allow businesses to fund growth and build shareholder value. With an optimized AP process, there are structured processes in place so that invoices are received and processed within a timely manner. However, as part of this process, management must emphasize the importance of optimizing work capital in its culture as it involves collaboration within the whole organization from submitting POs, receiving invoices, and reviewing/approving invoices to processing payment for the invoice.

What are the main activities to optimize to improve accounts payable processing and reduce bottlenecks? How can automation help?

With the advanced technology that we have today, we would always see efficiencies with automation.

Processing invoices may seem quite simple and easy from receiving the invoice to issuing payment. However, there are often many manual tasks that are performed behind the scenes. These manual tasks include invoice data entry, scanning invoices, following up with approvals, providing payment updates/remittances and mailing cheques (just to name a few) which often causes bottlenecks. In essence, the more manual tasks that are involved in the AP process, the more bottlenecks and human errors occur.

A great way to reduce bottlenecks is to use AP automation software. Tasks such as scanning invoices, entering invoice data, matching invoices against PO, and routing invoices for approvals can all be automated. This will greatly reduce invoice processing time and human errors while freeing up time from repeatable tasks to reallocate to value-add tasks.

How can you select and negotiate with vendors to create favourable buying terms? (i.e customer service quality, payment terms, price etc.)

During the vendor negotiation process, always negotiate for longer payment terms or early payment discounts to save costs or free up cash flow. It helps to utilize a vendor evaluation and selection matrix (or a decision matrix) to compare different vendor pricing and offerings to help with the decision process. This matrix can be leveraged during the negotiation process to induce suppliers for better pricing/payment terms and services.

What are some best practices companies can adopt to create both quick wins and long-term results?

Go paperless!

There are many options for electronic payment nowadays. Companies should move away from issuing cheque payments and transition to the different forms of electronic payments available today. When companies issue cheque payments, it requires a lot of admin work. The cheque needs to be issued, signed off and then mailed out (which often time takes 3-5 days to arrive at the destination). If the cheque is stale dated it needs to be re-issued and if it gets lost in the mail a stop payment needs to be processed. All of this admin work can be eliminated if businesses move towards electronic payments. With electronic payments, payments are made quicker, it is more secured and it does not require as much admin work.

Create and manage an AP workflow

Proper management of AP workflows is very important. Oftentimes, particularly near month-end, quarter-end, or year-end closing, there are high volumes of invoices that need to be posted before the books are closed. Without a proper workflow in place, it is common to see a backlog of invoices in the queue pending approvals which can cause delays or often an oversight in approvals due to the high volume of invoices that needs to be reviewed.