Accounts Payable Department: The Essential Guide for Businesses

Accounts payable is an important financial function for a company. The accounts payable department plays an important role in maintaining your company’s wealth and reputation. The accounts payable department is responsible for maintaining vendor relations by processing invoices on time, avoiding increased costs and any supply chain disruptions. In this blog, we’ll discuss the function and business structure of the accounts payable department.

What is the accounts payable function?

Accounts payable is the money owed to a company’s vendors or other creditors for purchase made on credit. These are generally due in a short amount of time and hence are considered short-term liabilities in the balance sheet. 

The accounts payable function in a company consists of processing invoices and paying them after checking their validity and getting necessary approvals. 

Steps involved in the accounts payable function

• Invoice received:

The invoice is sent over by the vendor after goods or services have been delivered. Invoices are generally sent to a designated PO box or to an AP inbox within the company. 

• Invoice data entry:

The invoice details are then entered into the accounting software and other books correctly. These are also verified before the invoice is processed.

• GL code and cost center allocation:

The invoice is assigned correct GL codes and cost centers based on line items involved.

• Approval routing:

The invoices need approval from necessary business approvers before payment is processed. 

• Payments:

The vendor is then paid by his preferred mode of payment. Some payment methods, like checks, require additional sign-offs from the finance department. 

• Vendor management:

All vendor information, such as tax forms, contracts, addresses and payment details, need to be up to date. Constant communication with the vendor is also of the utmost importance. 

What is the role of the accounts payable department?

The accounts payable department manages the day-to-day accounts payable of a company. Few smaller companies might have a common accounting team for managing all financial functions such as accounts payable, accounts receivable and month-end closing. Here are the responsibilities of the accounts payable department: 

Responsibilities

Review and correctly enter invoices

The accounts payable department correctly filters and enters invoices into the accounting system. They also assign invoices to correct GL accounts and cost centers, and perform 2-way, 3-way or 4-way matching if their company requires. They raise any discrepancies past a certain threshold to the vendors for a corrected invoice. 

Obtain approvals

The accounts payable team then sends the invoices to relevant business units for approval. They must manage necessary follow-ups and vendor communications in case the approver finds an issue.

Make payments

The team then processes payment to the bank account details provided by the vendor in his preferred mode. They also verify vendor payment details regularly before processing the payment and communicate the status with the vendor. 

Manage vendor relationships

Maintaining strong relationships with vendors is one of the most important duties of the accounts payable team. They must ensure correct vendor details are in the vendor master and keep vendors informed of every step their invoice takes in the AP process. 

Prepare reports

The accounts payable department also helps in month-end and year-end closing by preparing AP reports. 

How to organize your accounts payable department

Accounts payable is an essential part of a business functioning. Disorganization in the accounts payable department can lead to late payments and unhappy vendors, disrupting both cost management and the supply chain of the organization. Here are some tips to organize your accounts payable department:

Segregation of duties

Assigning specific roles to individuals in your accounts payable department would improve ownership and accountability among employees. Segregating duties also helps reduce multiple access to sensitive information, helps prevent internal fraud, and quickly catches any perpetrator. 

Centralize processes

Centralizing data and processes onto a single platform will reduce the hassle of tracking down individuals for relevant documents and help speed up invoice processing. Centralized processes also create a shared visibility into important AP metrics and help strategize process improvements. 

Adopt card payments

Adopting corporate cards and other electronic payment methods doesn’t only reduce the inconvenience of printing and mailing checks and managing inventory. They also provide attractive rewards or cashbacks and are easier to track for vendor communication. 

Automating accounts payable

Adopting AP automation will reduce the manual workload on your AP team and significantly reduce errors and processing times. 

How AP automation can help your accounts payable department

With automation taking over every aspect of modern society, it has become essential in the accounts payable function. Automating your accounts payable department’s work can benefit both the team and the company greatly. AP automation solutions automate invoice data entry, GL code, and cost center allocation. It also sends timely reminders to business approvers. Some AP automation vendors, like ClearTech, also give real-time visibility of your spending through interactive AP, spend and savings dashboards. With ClearTech, your team can communicate effectively with your vendors when rejecting or canceling an invoice, always keeping them informed. 

Your accounts payable department can also easily see duplicate invoices and essential metrics, such as spikes in line item amounts on the invoice processing screen, allowing them to take care of issues before they arise. With automatic payment run creations according to payment mode and due dates, you can also ensure timely payments. 

Conclusion

The accounts payable department takes care of managing the accounts payable function of a company. The responsibility of the AP team ranges from receiving and processing invoices, entering data into the accounting system, matching invoices with relevant POs and other documents to gaining approval from relevant business heads and processing payments. They are also responsible for verifying vendor details such as bank accounts number and address and maintaining an open line of communication with them. To organize their AP department well, companies should centralize their processes and segregate duties assigned to individuals within the team. Adopting card and other electronic payments and AP automation solutions can also greatly improve AP team’s work. AP automation also provides the added benefit of faster invoice processing time and fewer errors, allowing you to save money.