Understanding the accounts payable process

Whether you’re running a medium-sized business or just starting out as an entrepreneur, understanding the accounts payable process within your expense and purchasing cycle is important.

So, what is it, and why should you be concerned? This guide will explain everything you need to know about the accounts payable process and why it is important to the financial health of your business.

Here’s what we’ll cover:

What is the process for paying accounts?

Accounts Payable (AP) is money your business owes to suppliers and vendors for goods and services you have received but not yet paid for. It appears as a credit on your balance sheet and is important when tracking how money comes in and out of your business.

The accounts payable process, also known as the “full cycle of accounts payable,” includes everything from receiving the Purchase Order (PO) and invoice to making the payment. At a high level:

• You receive an invoice (and, where appropriate, a purchase order) from the supplier

• You review the invoice against the PO to ensure accuracy

• You approve the invoice

• You approve and send the payment

This sequence is also part of the wider P2P (Procure-to-pay) process.

Importance of advanced accounts payable workflow

If your accounts payable workflow is riddled with obstacles, you risk late payments, duplicate bills, overpayments, and frustrated suppliers. A smooth AP process helps avoid these problems and brings many benefits.

It helps you:

Track invoices

AP’s automated system updates invoices in real time, so you always know what payments you’re due.

Pay on time, every time

Automatic reminders and a schedule help ensure you don’t miss deadlines and avoid penalties.

Eliminate manual labor

Automation reduces the need for manual data entry and processing, reduces the risk of errors and frees your team from repetitive tasks.

Speed ​​up financial transactions

With streamlined workflows and automation, your finance team can process payments quickly, allowing them to focus on high-value activities.

Save time for other goals

By reducing the amount of time spent on manual AP tasks, you give your team more time to address key priorities and contribute to business growth and success.

Build relationships with suppliers

Consistent and timely payments build trust and strengthen relationships with vendors, which can lead to better documentation, discounts, and partnerships.

Avoid late fees and penalties

A structured accounts payable process ensures that payments are never missed, helping you avoid costly late fees and penalties.

Prevent fraud

Built-in controls help detect and prevent fraudulent activities by flagging suspicious transactions and enforcing proper authorization.

Challenges in the accounts payable process

If your AP workflow is done manually, you may encounter several problems, including:

• Missing invoices: paper or email invoices can be lost, risking late payments, supplier disputes, and VAT reporting problems.

• Time consuming supervision: Sage found that 77% of CEOs in European markets spend time each month chasing overdue invoices. In fact, 4 out of 10 do this every week. They don’t spend that time on growth or new ideas.

• Data entry errors: manual AP work can lead to typos, misplaced documents, and miscalculations—all of which distort your financial data.

• Scaling problems: rapid growth or seasonal increases in invoices may override the AP’s manual process. Automated systems handle high volumes smoothly.

• Multiple payment methods: managing everything from BACS transfers to paper checks can quickly get wasted. Without the right tools, you risk errors and delays.

Steps in the accounts payable process

The end-to-end accounts payable cycle includes four key steps:

1. To capture an invoice

First, collect the invoice—via email, mail, or a digital invoicing system—and record it in your accounting system. Automated tools like cash flow management software can handle this step automatically.

2. Invoice approval

Then review the invoice for accuracy, including prices, prices, and discounts. Once you’ve confirmed it, the invoice needs to be approved, usually by someone on your finance team or management.

3. Payment processing

Once the invoice is approved, it’s time to pay your supplier. Common payment methods include BACS, instant payments, cheques, and virtual cards. Be sure to match the payment to the correct invoice to avoid confusion.

4. Payment recording

Finally, enter payment into your accounting system to keep your books accurate and make future reporting easier. Automation helps here, too, by updating records without the need for additional data entry.

Applying best practices in the accounts payable process

Now you know what the accounts payable process is and its full cycle. Now is the time to make sure you are doing it right. Here are three best practices to keep your AP process running smoothly:

1. Reduce the test run

Checking the papers can be time consuming. Instead of taking them out every few days, try combining payments and using checks every two weeks (or every month). Fewer inspections mean fewer opportunities for errors and confusion and a simpler AP workflow overall.

2. Restrict access and establish controls

Ask yourself: who can change supplier information? Restricting access to your server master file helps you maintain tight control over important information. Assign specific roles and permissions so that only trusted team members can add or update vendor information. Everyone can watch but not plan.

3. Eliminate AP fraud

Unfortunately, fraud is a real concern—79% of organizations experienced payment fraud attempts by 2024. You can protect your business by:

• Setting strong internal controls.

• Viewing fake merchant accounts.

• Limiting the ability to add new salespeople to authorized employees.

• Using multi-factor authentication (MFA) to protect financial systems.

• Training your team to spot red flags and report suspicious activity.

Streamline the accounts payable process with AP automation

AP automation tools allow you to scan invoices, match them to purchase orders, and manage VAT. It’s a game changer for businesses looking to save time and reduce errors. In fact, by 2030, up to 30% of current work hours could be automated with AI, according to McKinsey.

Here’s why AP automation is important:

• Simplify accounts payable: AP automation software keeps your cash flow in check and ensures that invoices are paid on time. By automating the AP process, you reduce human error and reduce costs, freeing up time and resources for other important tasks.

• Improves productivity: manual AP processing can be a huge challenge on your team’s time and energy. Keeping track of all supplier agreements and processing hundreds of invoices per day can be overwhelming. Automation handles all the work, eliminating thousands of hours of manual data entry.

• Improves cash flow management: with automated AP software, you get real-time visibility into your cash flow. No more confusion, clear, up-to-date reporting that helps you manage your finances better.

• Streamline the approval process: manual approval processes often lead to late payments, missed invoices, and overworked teams. AP automation software streamlines the entire approval process, from routing invoices for review to notifying stakeholders. It also includes built-in permissions to prevent fraud and unauthorized purchases.

Next steps to streamline and strengthen your accounts payable workflow

With the right approach, you can avoid common pitfalls, streamline your workflow, and ensure that your finances stay in top shape.

Sage’s accounts automation software solutions are designed to make your life easier. From managing invoices to real-time reporting, you can improve your AP with its automation and easy integration.

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