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Accounts Payable – Best Practices

by Capt. Samarth Singh on November 23rd, 2010


To sum up, Accounts Payable at its basics is a not all that different from home expenses. The controller of a house hold expects a set of utility bills at the beginning of the month which need to be cleared typically by the 10th of the same month. While the essence of Accounts Payable remains the same the nature of the account or ledger may get significantly more complicated, especially in a sizable organization, owing to the large flow of incoming invoices and outgoing checks/payments. Fortunately, one can implement some quick fixes to ensure things within the system remain well oiled.

The objectives of this manual are to:

  • Minimize technical glitches in the payment generation process
  • Minimize the cost involved in making a payment
  • Maximize vigilance over majority of the payments in process and reduce potential embezzlement
  • Avoid using payment methods with obscene interest rates
  • Encourage transparency
  • Maintain a clean record of the state of each step in the process

Minimize Technical Glitches

A technical glitch in Accounts Payable could be anything from assigning the wrong consignment number to an invoice to an insufficient consignment from the suppliers end to something as simple as an error in the name in which payment is to be generated. All of the above have two things in common:

  • They are all difficult to detect 15 days down the line because one loses track.
  • An inordinate amount of workforce is required to detect and rectify the situation resulting in loss of usable man hours.

While employee counselling and self improvement is highly recommended, Technical Glitches and Human Error are best countered with proactively using technology and software. The vendor master or client master file is a consolidated account of all goods received and payments issued to a particular supplier. Organizations today rely on very user friendly software which makes administering the vendor master file very simple!

Using automated software gets rid of age old AP glitches like generating one cheque for 2 suppliers and duplicate payments to a single supplier.

Minimize Cost

The unnecessary stationery costs involved in making any one payment has potential to be reduced to practically nothing by encouraging green practices. Technology today, has made it possible to maintain records spanning 320GB and more on an Hard Disk Drive the size of a credit card. One can only imagine how much of text can be crammed into 320GB. Furthermore, all of this can be maintained under a secure, password protected environments with selective access. This is certainly better than files and folders in a cabinet under lock and key! That takes care of the documentation involved in payment processing.

Interestingly, how many times have you come across a document that on the bottom says ‘This is a computer generated statement and doesn’t require signature or authentication’ Well, if it doesn’t require physical signature, why was it printed on paper in the first place?

To make things better, technology today also allows for a legal, authentic and fully traceable payment without having to write a check! ECS or electronic clearing service more often known as a wire transfer potentially nullifies the requirement of a check!

To sum up, think of the amount of paper and space one would have used to store 320GB of text. Think of the number of cheques one would have generated and stored.

Maximize Vigilance and reduce embezzlement

For both, monetary and ethical reasons the personnel responsible for the AP must keep a close watch on his subordinates. Accounts Payable leave plenty of room for manipulation and one can lose a lot of money in the process.

Once again, software with restricted access is your best bet but practices like frequent audits sometimes without prior warning and encouraging the use of e-mail with back up of correspondence can help reduce cases of fraud from both the company’s and supplier’s ends.

Avoid using payment methods with obscene interest rates (Credit Cards)

Often misinterpreted as ease of access, some small companies prefer using credit cards to clear outstanding payments. One must be advised that even though this may be viewed as a green practice and it does reduce paperwork, using a payment process that involves an applicable interest rate complicates the payment method and hence causes a conflict with both Minimizing Technical Glitches and Minimizing Potential Embezzlement.

Encourage Transparency

One must remember that the supplier you’re dealing with is also a business owner, however small or big, and is subject to the same set of grievances as you are pertaining to funds and cash flow. A small gesture on your part can go a long way in avoiding unpleasant encounters and late payment fees.

A very simple example would be, Company A owes Company B which in turn owes Company C. Company C levies interest on late payments unless informed of an impending delay well in advance. Wouldn’t it be best to inform Company B of a potentially delayed payment now rather than keeping them on tenterhooks till the last moment?

In retrospect, it’s prudent to for Company A to be aggressive with demanding its dues from its own clients as well in order for it to know where it stands with cash flow. This helps Company A make a more prioritized decision on release of Accounts Payable.

To sum up, try sticking to your payment deadlines and tolerances as prescribed on the purchase order/work order!

Maintain a clean record of each step in the process

It is impossible to troubleshoot without a legitimate backtracking channel. In the event that a dispute breaks out, a clean record of every single move made is a blessing in disguise.

The best piece of advice one can offer his subordinates is to keep the process as simple as possible. Minimizing paper is the first step. Paper needs to be stored, filed and archived. It needs to be sorted and often reaches inaccessible places. Paper is difficult to find in the event that quick action is needed.

Standardization of invoice processing so every employee performs the job similarly is step two. A very effective solution is to issue and implement a department wide flowchart for invoice processing. This way, in the event that a dispute occurs, and we know the issue, backtracking becomes a breeze since everybody would have processed the papers conforming to the flowchart!

Accounts Payable, like any other department will have its glitches and shortfalls. There’s no substitute to innovation. So managers and other decision makers must be on the prowl for new, simpler technologies 24/7/365.

One Comment
  1. this site is really great.. nice layout

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