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.
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
Transportation and logistics
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.
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
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 Sheet
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.
AP teams have the ability to accelerate cash preservation, boost productivity and cut costs through the following business objectives:
Working Capital Optimization
Accounts Payable exists to ensure the suppliers are paid on-time for the goods and service required by the business as efficiently as possible. Using tools like AP automation, teams can influence Labor Productivity by improving cycle time and reducing costs. They can help the business better manage working capital by increasing DPO, pay on-time and creating a negative cash conversion cycle (i.e. inventory is sold before the business has to pay for it). They can drive Cost Avoidance by capturing cash discounts, preventing duplicate payments and avoiding penalties. And, AP teams can ensure compliance by verifying on-time payment with the correct amount.
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.
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.
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.
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
Invoices filled in wrong
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.
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.