The Accounts Payable Process
All businesses, no matter their size, have bills to pay. The larger the business, the more formal the accounts payable process tends to be. That doesn’t mean small business owners can’t benefit from a formal accounts payable process. Too many “fake” bills are being sent, and all businesses should have safeguards in place. Let’s take a look at the workflow of accounts payable to see where we can put some controls in place to protect your hard-earned money.
A good first step is to initiate a purchase ordering process. All spending over a certain amount, such as $500, should require pre-approval from a manager or officer of your company. This can take the form of a purchase order.
A purchase order (PO) is simply a pledge on the part of your company to purchase an item or group of items from a particular vendor. It should include the vendor’s information, the item(s) and quantities, the price that the vendor has agreed to, and who initiated and approved the proposed purchase. It will look similar to an invoice, but it’s not an invoice and should be appropriately marked.
If the price is not standard or the items are custom, there may be an estimate from the vendor that documents the price on the purchase order. The estimate document is written by the vendor, while the purchase order is originated by your company.
While the purchase order is important, it does not create any entry on your accounting records, as no transaction has taken place yet.
The invoice is the documentation of the purchase with a request for payment and is created by the vendor you are obtaining goods or services from. It should be recorded on your accounting books once it is received from the vendor.
The invoice should be matched with the purchase order, checking to see if each item, quantity and price match the same on the purchase order. Any discrepancies should be explained.
The timing of the invoice can vary. It may be received before or after you actually receive the goods or services that it covers.
The invoice should not be paid yet (unless prepayment is required). We’ll cover that in a minute.
If the goods you have ordered are physical and are to be shipped to you, then there will usually be a packing slip or shipping document included in the shipment. The shipping document will have quantities, but may not have prices. The document should be matched with the actual items received and any shortages or overages should be noted.
A process to stock the items into your inventory should then occur. A transaction should be entered into your system to increase inventory for the goods you receive.
The (corrected) packing slip should be matched with the invoice to make sure everything on the invoice was received. If there is a discrepancy, it should be noted.
Items may come in a later shipment if they have been back-ordered. You’ll need to set up a process for that, noting it on the appropriate documents.
As you can see, a couple of processes need to be put into place. There should be a process for each document listed above. There should also be a process for matching the documents, and there should be a process for when there are discrepancies. Last, there should be approval processes all along the way.
Your workflow may vary from the one listed above, depending on the order the documents are received and when payment is required. You may even have a different workflow for different vendors.
Once the purchase order, shipping document, and invoice have been matched and corrected, it’s time to get them approved for payment by the appropriate level of management that you desire. This is something you’ll want to set up in advance: which of your employees can spend and approve what amounts.
Once your invoice is approved, it is time to look at the payment terms, noting when payment is due. It can then be set up to be paid. This can be done inside a system, using a company credit card, sending a bank transfer or wire, or writing, signing, and mailing a manual check.
Payment affects your books as well, so an entry should be made when payment is issued.
A great accounts payable workflow will protect your company from unauthorized payments, missing items, and even hasty purchasing decisions. There are also many accounts payable systems to support the automation of many of the steps, but don’t forget you still need to set up the processes so they work for your company and the vendors you use.
As always, if you need our recommendations, we’d be happy to help.