DEFINITION ACCOUNTS PAYABLE BEST PRACTICES

The accounts payable function is the absolute most labor-intensive of all of the accounting functions and is therefore a great source of labor savings if the correct best practices may be implemented. The essential process in most companies is for three forms of information from three sources—an invoice from the supplier, a purchase order from the purchasing department, and a proof of receipt from the receiving department. The accounts payable staff then matches all three documents to ensure a prospective payment is authorized and that the underlying goods have now been received, and then pays the bill. The procedure is labor-intensive partially since there is this kind of wide range of matching to do, but also because the three documents hardly ever match. Either the purchase order quantities or prices do not match what the supplier is charging, or else the total amount received doesn’t match the quantities on the other two documents.

Because of these inaccuracies, the quantity of labor needed to issue a payment may be extraordinarily high. The very best practices in this chapter fall under several main categories, a lot of them designed to cut back the matching work. One category attempts to consolidate how many invoices arriving from suppliers, thereby shrinking the paperwork from this source—typical best practices in this area are utilizing procurement cards and shrinking the number of suppliers. Another category tries to reduce or eliminate the amount of receiving documents. Typical best practices in this area are substituting occasional audits for ongoing matching of receiving documents, in addition to directly entering receipts into the computer system. Finally, another category reduces the amount of purchase orders that must be matched. Typical best practices of this type include using blanket purchase orders and automating threeway matching. Other methods to the matching problem involve going far from the original matching process entirely, by utilizing payments based solely on proof of receipt. It’s difficult to make use of all of these best practices together, since some are mutually exclusive—one must certanly be careful in choosing the correct best practices. Lastly, several best practices concentrate on the general accounts payable process, attempting to either shrink or automate the amount of steps required before a business issues payment to a supplier. Examples of best practices in this area include utilizing a signature stamp and switching to wire transfers. The amount of best practices in the accounts payable area indicates this function is ripe for improvements. However, some best practices need a large investment of money or time, as noted in the chart within the next section, so the person doing the improving should verify that resources can be found before embarking on an implementation.