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What is Accounts Payable? The process, business objectives and KPIs that matter
Accounts Payable is a crucial business function that corporate decision makers can leverage to control working capital, manage supplier relationships and reduce costs.
Here’s a breakdown of the Accounts Payable process, important metrics and methods for achieving execution excellence through continuous process improvement.
What is Accounts Payable (AP)?
Accounts Payable (AP or A/P), sometimes called “payables,” is a key part of how businesses control their cash flow. In general accounting terms, AP is a current, short-term liability/debt for goods or services received on credit from a vendor. Within a company's financial statements, Accounts Payable appears as a debit on the balance sheet.
An organization’s Accounts Payable team, often located within the Finance department, is responsible for processing and paying supplier invoices. They also play a key role in maintaining vendor relationships as they are often the point of contact for invoicing and payment-related issues, such as payment status.
An AP expense can be anything from office supplies to restaurant ingredients and includes, but is not limited to:
Energy and fuel
Equipment
Leasing
Licensing
Moving expenses
Products
Raw materials
Services
Transportation and logistics
Travel expenses
Accounts Payable has historically been thought of as a cost center, but in reality it’s a strategic tool for managing working capital. In periods of high inflation, supply chain disruptions and global macroeconomic instability, AP procedures can be adjusted to preserve cash by paying invoices later (extending payment terms) or improve profitability by paying invoices early to receive cash discounts. Businesses can maximize their AP execution capacity by dynamically adjusting invoice processing.
What is the Accounts Payable process?
Accounts Payable sits within the Procure-to-Pay (P2P), sometimes called Purchase-to-Pay, business process after Procurement, also called Purchasing. More broadly, P2P is the second stage of the Source-to-Pay (S2P) process after Sourcing.
The AP process itself contains the following steps in order:
Purchase and receive goods
Record invoice receipt
Post Invoice
Clear Invoice
Due date passed
“Purchase and Receive Goods” is often handled by the Procurement team, with the AP team completing the remaining steps.
Download Celonis EMS Accounts Payable Execution App Data SheetHow is Accounts Payable different from Accounts Receivable?
Accounts Receivable (AR or A/R), sometimes called “receivables,” is the current money owed to your company for products and services that have been rendered but not paid for (on credit). Accounts receivable is considered a current asset on a corporate balance sheet, whereas accounts payable is considered a current liability. Like AP, the AR team is often located within the Finance Department.
Accounts payable objectives explained?
AP teams work towards achieving a variety of outcomes. Here are eight common accounts payable objectives:
1. Boost productivity
Accounts payable activities such as manual invoice entry and payment term validation are time consuming, resulting in long cycle times which drive up costs.
By automating these necessary but routine activities, AP teams can boost productivity and free up valuable time to work on value-add activities. Increasing touchless invoice rates is often one of the key accounts payable objectives.
2. Optimize working capital
Getting the best possible payment terms, and ensuring these are adhered to is an effective way of optimizing working capital, making sure payments are made on time but not earlier than necessary.
By maximizing days payable outstanding (DPO), AP teams can increase working capital and improve free cash flow. They may even be able to create a negative cash conversion cycle where inventory is sold before the business has to pay for it.
3. Improve on-time payment
While late payments can result in costly penalties, and early payments can unnecessarily impact DPO, on-time payments can help businesses make valuable savings with cash discounts.
Accounts payable can make the most of these discounts by prioritizing critical invoices and resolving payment blocks to ensure invoices can be processed and paid at the right time.
4. Reduce rework costs
Errors within accounts payable often result in unnecessary costs associated with rework or recovery. Reducing errors, and therefore cutting rework costs, are key accounts payable objectives.
Duplicate invoices are a great example, and frequently result in organizations paying multiple times for the same goods or services. They then spend time and money recovering the duplicate payments if and when they are identified.
5. Ensure compliance
All teams within the finance department inevitably have to comply with strict rules and regulations, and accounts payable is no exception.
One example is ensuring that an invoice isn’t both checked and approved by the same person, which would typically be a segregation of duties violation. With regulations continually evolving, ensuring compliance is a challenging objective.
6. Prevent fraud
Accounts payable fraud can severely damage a business’ reputation as well as its financial health, so preventing fraudulent payments and activities is always on the list of accounts payable objectives.
By identifying bottlenecks, inefficiencies, and non-compliant process deviations that may be allowing fraudulent activity to occur, AP teams can drastically reduce the risk of fraud.
7. Support suppliers
The accounts payable department exists to ensure suppliers and vendors are paid for the goods and service required by the business as efficiently as possible. And managing invoices effectively is essential to building good relationships with suppliers and vendors.
With the supplier landscape changing rapidly, AP teams need to stay on top of new partnerships and the associated payment terms to ensure they can maintain those strong relationships.
8. Correct currencies
With global transactions on the rise, accounts payable teams are likely to be working with an increasing number of currencies. And with exchange rates constantly fluctuating, paying the incorrect amount is all too easy.
Monitoring and correcting invoice currencies where necessary is essential to avoid the costs associated with paying too much or too little.
What are Accounts Payable metrics and KPIs?
There are multiple metrics, or key performance indicators (KPIs), businesses track to determine whether Accounts Payable is meeting core business objectives. Here are six common AP metrics that fall under each of the four business objectives listed above and include:
Cost per Invoice - Labor Productivity
No-Touch Rate - Labor Productivity
Days Payable Outstanding (DPO) - Working Capital Optimization
Excess Spend - Cost Avoidance
Late Payment - Cost Avoidance
Pre-Approved Spend - Compliance
The Accounts Payable department can improve their KPI performance and ensure process excellence by using automation, Process Mining and Execution Management to reduce vendor invoice errors, eliminate duplicate payments, capture cash discounts, avoid penalty and late payments, stop maverick buying and maintain approval compliance.
More Accounts Payable resources | More Accounts Receivable resources
What is Days Payable Outstanding (DPO)?
Days Payable Outstanding is the average number of days a company takes to pay its bills. A higher DPO means a company takes longer to pay its debts. A lower DPO means a company pays its bills more quickly. AP departments can use DPO to manage free cash flow and working capital. By extending DPO, companies can hold on to cash longer or use it for short-term investments. However, a high DPO could also be an indication that an organization is having difficulty paying its bills. Also by reducing DPO, companies may be able to take advantage of supplier cash discounts.
What is an average DPO? It depends on the industry, but according to the J.P. Morgan Working Capital Index Report 2022, the average DPO for 2021 was 47.4 days. From 2011 to 2021, the average DPO fluctuated between 45.8 in 2012 and 51.1 in 2020 during the Covid-19 pandemic.
What use cases are deployed by Accounts Payable Improvement teams?
There are many use cases to optimize AP operations, but here are five that businesses such as GE Healthcare, HP and Deutsche Telekom Services Europe have used:
Prevent duplicate invoice payments. Companies lose significant amounts of cash from paying duplicate invoices. Unfortunately, many ERP systems only detect duplicates that are 100% matches, and don't detect small differences such as typos, scanning errors or inaccurate master data. Duplicate invoices can also happen when the same invoice is submitted in paper and electronically. With process mining, execution management and machine learning, AP departments can better detect duplicate payments, reclaim the associated payments and proactively prevent future duplicate payments.
Minimize Payment Term Mismatches. Too often, AP teams can’t tell whether an invoice’s payment terms match those within the vendor’s contract, which could be more favorable to your business. Companies operating at peak execution capacity are able to scan each incoming invoice and detect discrepancies in the payment terms between the invoice, purchase order (PO), vendor master data and historical invoices from that vendor.
Maximize Cash Discount Utilization. Payment blocks and lengthy invoice processing times often mean companies don’t capture all of the cash discounts available to them, which hurts operating margins. The Accounts Payable office can leverage automation and process mining to determine which vendors would be the best candidates for cash discounting, pinpoint when and where leakages are happening and prioritize the removal of vendor payment blocks to capture discounts.
Minimize Payment Blocks. Payment blocks happen when there is a price or quantity mismatch between the PO and invoice, or missing goods causes a three-way match error. If blocks prevent AP from making a timely payment and result in excessive late payments, suppliers may prioritize other customers or cancel orders. AP departments can use an execution management system to identify the root causes of mismatches and missing goods receipts, allow purchases to update PO prices and confirm goods receipts and even automate block removal.
Prevent Currency Mismatches. As companies grow their international business, they may also experience a rise in foreign currency transactions. To reduce incorrect payments, AP teams must identify the correct currency for a transaction. Process mining and execution management solutions can be used to detect and flag incoming invoices with unusual currencies (based on historical invoices, the PO and master data) so analysts can take action.
What are Accounts Payable challenges?
Regardless of the industry, company size or AP software used, Accounts Payable departments face many of the same challenges. Here are six common problems that prevent companies from running an efficient AP operation:
Payment term discrepancies between invoices and POs
Missing documents
Late invoices
Invoices filled in wrong
Duplicate invoices
Lengthy approval times
Process Mining and Execution Management give AP departments the means to overcome these challenges without the cost and disruption of replacing existing hardware and software.
What roles do Automation, Process Mining and Execution Management play in Accounts Payable?
Accounts Payable automation helps improve AP productivity by streamlining procedures, reducing manual work, reducing rework caused by human errors, and increasing process consistency. AP automation comes in many forms from simple spreadsheet macros to full-blown robotic process automation (RPA), and it can be used to automate everything from invoice routing and approval to managing purchasing card transactions. Indeed, it would be unrealistic for today’s large enterprises to manage the volume of transactions that flow through their AP departments without some form of automation.
The question for AP executives is therefore not not whether to implement automation or not, but which AP processes should they automate and how do they realize the maximum benefit from their automation efforts? Process Mining and Execution Management can address both concerns.
Process Mining pulls data from your existing business systems, creates an X-ray of your AP process and identifies any execution gaps. Understanding where your biggest inefficiencies are gives you a starting point for your AP automation strategy.
Execution Management combines Automation, Process Mining and technologies such as artificial intelligence and machine learning into a single platform, an Execution Management System (EMS). An EMS ingests data from multiple business systems, analyzes that data and then automatically executes targeted actions through those existing systems. By delivering insights and enabling action, an EMS allows AP organizations to operate at maximum capacity.
Related reading:
Here's what CEOs, CFOs are saying about inflation, supply chain disruptions
Global CEOs aim to bolster supply chain resilience amid inflation, recession worries
Why inflation, supply chain, sustainability crises require Execution Management, efficiency gains
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