Accounts Payable: What It Is and Best Practices

As a small business owner, tracking payments to suppliers is key to keeping your financial operations running smoothly. Accounts payable can keep track of your outstanding invoices. When handled correctly, managing your accounts payable helps maintain relationships with vendors, pay invoices on time and avoid any disruptions to your business. Let’s look at some best practices and ways you can improve your accounts payable process. 

What are accounts payable?

Simply put, accounts payable comprises all your short-term debts to suppliers. Whenever your business makes a purchase, you will generally fill out a purchase order and send it to a supplier. You’ll receive the items with an invoice attached, stating how much you owe. When taken together, the total amount you owe to all your vendors equals your accounts payable. Once you’ve paid, you’ll receive a receipt, allowing you to remove that amount from your total accounts payable, which can be found on your business’ balance sheet.

Because issues with your accounts payable can become a financial liability, it’s in your business’ best interest to manage your outstanding payments quickly and efficiently. Keeping track of your accounts payable generally helps manage cash flow and helps you, your creditors and investors understand how much money is being spent on suppliers.

How the accounts payable process works

Whether you have a dedicated accounts payable team member or you’re handling it as part of your regular financial management, having a standardized process for handling the money you owe can keep you from becoming overwhelmed. Everyone’s specific business needs are different, but many small businesses may benefit from following these steps.

• Step 1: Invoice intake: Receive and record invoices you’ve received from vendors and suppliers.
• Step 2: Validation: Match the invoice you’ve received to the purchase order or receipt it corresponds to. Make sure the amount listed on the invoice matches what you’ve agreed to pay on the purchase order.
• Step 3: Approvals: Forward the invoice to the department responsible for payment so a manager can approve payment. If you’re a larger company, you may use a coding system to ensure invoices are efficiently tracked.
• Step 4: Payments: Transfer funds to the supplier or schedule a payment to be made at a later date.
• Step 5: Reconciliation: Record and verify that all the recorded payments match the amount of money paid out before archiving the invoice.

Accounts payable basics and best practices

In order to efficiently manage the accounts payable process, it is beneficial to take the time to learn these basic best practices.

Create clear management policies

Draft clear policies that list who in your business handles incoming receipts, what team members can approve payments and what bank accounts payments draw from to avoid confusion or disruptions to your business. Even if the process seems obvious, having your accounts payable policy in writing will prevent confusion and get new team members up to speed quickly.

Set specific payment terms

Simplify your process when making deals with your suppliers by adding specific payment terms to your contract. Set company-wide policies like paying all invoices within 30 or 45 days so both parties are clear on when to expect payments and lay out exactly how the funds will be transferred (check, wire transfer, etc.).

Handle vendor data responsibly

Make sure you’re protecting vendor information to avoid data breaches that may expose the data of both your vendors and your customers. If you have an IT department, ask for their guidance in developing internal policies to avoid unnecessary exposure of vendor data and conduct training around phishing schemes and online fraud.

Use three-way matching

For every invoice, confirm that you’re paying the correct amount by utilizing a process known as three-way matching. This simply means checking the purchase order, invoice and receipt for any goods before releasing payment to make sure there are no discrepancies. 

Use automated matching and approval where possible

Some accounting programs may be able to automate the accounts payable process for you. For instance, they may be able to perform three-way matching or route invoices to the correct team member for approval automatically.

Keep audit-friendly records

Just because you’ve paid an invoice doesn’t mean the accounts payable process is over. Maintaining good records of all payments is key to financial stability. Whether you’re performing an internal audit to check for fraud or are required to do an external audit for tax or investment purposes, having a well-organized archive of all purchases can paint a clearer picture of your company’s financial health.

Take charge of your business’ accounts

A well-run accounts payable procedure may ensure your company’s financials are accounted for and can help keep you from being unaware of any cash flow issues or surprise payments. Take time to double and triple check all invoices, purchase orders and receipts to confirm all information is correct. Once you have your processes implemented, you can focus on growing your business with a well-managed accounts payable system in place.

Disclosure: This article is for educational purposes. It is not intended to provide legal, investment, or financial advice and is not a substitute for professional advice. It does not indicate the availability of any Citi product or service. For advice about your specific circumstances, you should consult a qualified professional.