Accounts payable (AP) is the process of managing and paying for goods and services that a company has received on credit from its suppliers or vendors. The company can either manage the AP process manually or automate it. The global accounts payable automation market size is expected to grow at a compound annual growth rate CAGR of 10.4% from 2024 to 2034.

Below, we’ll explain how the accounts payable process works, why it’s important for businesses, and how you can implement and maintain a high-functioning, effective AP process.

What's in this article?

• What is the accounts payable process?
  
• Why accounts payable management is important for businesses
  
• Components of an effective accounts payable workflow
  
• What are the steps in the accounts payable process?
  
• Challenges in accounts payable processes and how to solve them
  
• Best practices in the accounts payable process
  
• How Stripe Revenue Recognition can help
  

What is the accounts payable process?

The accounts payable process is a foundational financial workflow responsible for managing a company's short-term obligations to its vendors and suppliers. When a business purchases goods or services on credit, the AP department is tasked with tracking these liabilities from the initial receipt of an invoice through to final cash disbursement.

The primary objective of this process is to ensure that all legitimate operational expenses are verified, approved, and settled on time, which helps businesses maintain strong vendor relationships, avoid late fees, and optimise their overall cash flow.

Why accounts payable management is important for businesses

How a company manages accounts payable can seriously affect its financial health, operational efficiency, and overall competitiveness. A strong AP management process can have the following effects on a business:

• Improve working capital: Effective AP management improves working capital by timing payments strategically and negotiating favourable terms with suppliers. This allows businesses to free up cash flow, reduce borrowing costs, and invest in growth initiatives.

• Mitigate financial risks: A good AP process helps identify and mitigate financial risks such as fraud, errors, late fees, and late-payment penalties. By using strong internal controls such as segregation of duties and regular audits, businesses can safeguard their assets and adhere to financial regulations.

• Earn a competitive edge: For businesses, a simplified AP process can mean more flexibility and resilience in the marketplace. They can create a competitive edge by processing invoices quickly, using early-payment discounts, and maintaining strong supplier relationships.

• Develop data-driven insights: Modern AP solutions offer powerful analytical tools that can provide valuable insights into spending patterns, supplier performance, and cash flow trends. Businesses can use these insights to make data-driven decisions that refine their AP processes and enable continuous improvement.

• Support strategic objectives: Companies can align their AP processes with broader business goals such as cost reduction, risk management, and growth.

Components of an effective accounts payable workflow

Here are the steps involved in a typical accounts payable workflow:

• Purchase order (PO) creation and approval: The purchasing department creates an authorised PO outlining the requested goods or services, quantities, and agreed-upon pricing.

• Goods receipt documentation: Upon delivery, the receiving department generates a goods receipt to formally confirm that the requested goods or services have arrived.

• Invoice receipt and capture: Suppliers send paper or electronic invoices. The company enters the invoice data into the AP system, either manually or through automation. Automated capture methods such as optical character recognition (OCR) technology and electronic data interchange (EDI) can accelerate this process and minimise manual data entry.

• Invoice validation and matching: The AP system checks invoices for accuracy against purchase orders and receiving documents. Automated three-way matching systems can reduce the risk of errors and discrepancies.

• Discrepancy resolution: If the system finds discrepancies, it resolves them before approval.

• Approval workflow: The system directs invoices to the appropriate personnel for approval based on predefined thresholds and authorisation levels.

• Payment authorisation: Personnel authorise the approved invoices for payment.

• Payment processing: The company schedules approved invoices for payment to suppliers, taking into account payment terms, discounts, and preferred payment methods.

• Accounting entry: The company records invoices and payments in the accounting system.

• Payment reconciliation: The business reconciles payments with invoices and bank statements.

• Vendor statement reconciliation: The business reconciles vendor statements with AP records.

AP workflow processes might also involve generating reports and looking at analytics for insight into AP performance and supplier management practices. Supplier onboarding, performance evaluation, and dispute resolution are all important practices that contribute to smoother operations and potential cost savings.

What are the steps in the accounts payable process?

Accounts payable process flowcharts visually represent the steps involved in processing invoices and making payments to suppliers. These flowcharts vary in complexity depending on the organisation’s size and specific requirements. Here are two common examples.

Basic AP process flowchart

This flowchart outlines the fundamental steps in a typical AP process:

• Invoice receipt: The organisation receives the invoice from a vendor through mail, email, or a digital accounting portal.

• Invoice validation: The AP team reviews the invoice to ensure it contains accurate billing details, correct tax information, and legitimate vendor credentials.

• Approval: The invoice is routed to the internal stakeholder or department head responsible for the expense to get official approval.

• Payment processing: The authorised payment is executed via the vendor's preferred method, such as an Automated Clearing House (ACH) transfer, corporate card, or wire.

• Accounting entry: The finalised transaction is logged in the company’s general ledger to ensure the financial books are accurately updated.

Detailed AP process flowchart

This flowchart provides a more comprehensive view of the AP process, including additional steps and decision points:

• Invoice receipt: The company officially collects the incoming invoice from the supplier through physical or digital distribution channels.

• Data entry or capture: Key invoice details are extracted and logged into the financial system, frequently leveraging automated OCR software to minimise manual typing.

• Invoice matching: The invoice is cross-referenced against the original purchase order (PO) and receiving report to confirm that the billed amounts match the items ordered and received.

• Discrepancy resolution: If any variances in price, quantity, or line items are discovered, the invoice is flagged and resolved with the vendor or internal team before moving forward.

• Approval workflow: The invoice routes through a predetermined hierarchical approval chain based on the total spend amount or specific department rules.

• Payment authorisation: Finance leadership reviews the approved invoice batch and approves officially releasing the funds.

• Payment processing: The disbursement is formally executed through the banking portal, transferring the funds to the supplier's account.

• Payment reconciliation: The completed transaction is matched directly against corporate bank statements to confirm that internal cash books perfectly align with actual bank activity.

• Vendor statement reconciliation: The AP team periodically cross-checks the vendor’s open balance statement against internal records to confirm there are no missing invoices, outstanding credits, or duplicate entries.

These are simplified examples, but real AP process flowcharts can be much more detailed, incorporating additional steps, decision points, and feedback loops. These flowcharts represent the AP process to identify potential areas for improvement and automation.

Challenges in accounts payable processes and how to solve them

The accounts payable process can present challenges that cost businesses time and money. Here are the common challenges and their solutions.

Manual data entry

Manual data entry is time-consuming, prone to errors, and can lead to delays in invoice processing and payment. These errors can result in duplicate payments, incorrect amounts, and strained supplier relationships.

• Solution: Automated AP solutions use OCR technology to extract data from invoices, automate three-way matching, and simplify approval workflows. This reduces manual intervention, minimises errors, and accelerates processing times.
  

Inefficient approval workflows

Lengthy and complex approval workflows can create bottlenecks, delay payments, miss early-payment discounts, and incur late fees. This can strain supplier relationships and hurt the business’s cash flow.

• Solution: A clear, digital approval workflow with automated routing, notifications, and escalation procedures can facilitate timely invoice approvals and reduce delays.
  

Limited visibility

Without real-time visibility into AP processes, it becomes difficult to track invoice status, identify bottlenecks, and monitor key performance indicators (KPIs). This lack of control can lead to surprises, missed deadlines, and sub-optimal decision-making.

• Solution: A centralised AP dashboard that provides real-time visibility into all aspects of the AP process can track invoice status, monitor approval workflows, identify exceptions, and analyse KPIs. This visibility enables proactive management and informed decision-making.
  

Fraud and risk management

AP processes are vulnerable to various types of fraud such as duplicate or unauthorised payments and fake invoices. These fraudulent activities can result in substantial financial losses and damage a company’s reputation.

• Solution: Strong internal controls such as segregation of duties, regular audits, and fraud detection mechanisms can mitigate fraud risk. So can AP automation solutions that incorporate fraud prevention features such as duplicate-payment and anomaly detection.
  

Supplier relationship management

Maintaining strong relationships with suppliers helps secure timely deliveries, favourable terms, and effective dispute resolution. Communication breakdowns and payment delays can strain these relationships.

• Solution: Clear communication channels with suppliers allow businesses to provide regular updates on payment status and promptly address any concerns or issues. Supplier portals and collaborative platforms can facilitate better communication.
  

Integration with enterprise resource planning (ERP) systems

Lack of integration between AP systems and ERP systems can lead to data silos, manual data entry, and reconciliation challenges. This can hinder efficiency and create inconsistencies in financial reporting.

• Solution: Integrate AP solutions and ERP systems. This eliminates manual data entry, reduces errors, and ensures data consistency across the organisation.
  

Best practices in the accounts payable process

Simplifying the AP process is key to improving operations, reducing errors, and strengthening vendor relationships. Here are some effective strategies:

Accounts payable process automation

• Use invoice processing software: Software can automate data capture, coding, and approval workflows. This eliminates manual data entry, reduces errors, and speeds up processing time.

• Use electronic payment methods: Electronic payment methods such as ACH transfers and virtual cards can automate payments, eliminating the need for manual cheque writing and mailing.

• Automate the matching process: Automated tools can match invoices, purchase orders, and receive reports with greater accuracy, preventing overpayment.

• Digitally store documents: Storing all AP-related documents (e.g., invoices, purchase orders) in a centralised digital repository keeps them easily accessible and organised.

Other best practices

• Standardise invoice formats: A standardised electronic invoice format (e.g., PDF) simplifies data capture and processing.

• Set clear approval workflows: A consistent approval process ensures timely invoice reviews and reduces bottlenecks.

• Negotiate consistent payment terms: Consistent payment terms with vendors can simplify payment scheduling and improve cash flow management.

• Establish vendor communication channels: A centralised communication channel for vendor inquiries ensures prompt responses and minimises confusion.

• Take advantage of early-payment discounts: These vendor discounts can reduce costs and improve cash flow.

• Refine payment timing: Strategic payment timing can maximise working capital and prevent late-payment penalties.

• Focus on vendor relationships: Strong relationships with vendors can help you negotiate favourable payment terms and resolve any issues quickly.

How Stripe Revenue Recognition can help

Stripe Revenue Recognition helps to streamline accrual accounting – including audits, end-of-month close, reporting, and more – so you can close your books with greater efficiency and accuracy. It automates and configures revenue reports to help support compliance with ASC 606 and IFRS 15.

Revenue Recognition can help you:

• Gain a more complete view of your revenue: In the Stripe Dashboard, see all your Stripe transactions and terms, and import non-Stripe data.

• Automate revenue reports: Generate accounting reports that are ready to use – without engineering resources.

• Customise for your business: Create and automate custom rules to recognise revenue, in line with your business's accounting practices.

• Audit in real time: Prepare for audits by tracing any revenue amount down to the underlying customers and transactions.

Learn more about how Revenue Recognition can help you comply with global accounting principles, or get started today.