Upstream and Downstream Processes in Accounts Payable: A Definitive Guide

Upstream and downstream processes in accounts payable work exactly like they would in production or supply chain management. The upstream process here refers to procuring or buying a company's goods and services. The downstream process refers to the final step, accounts payable. This step involves paying for the goods or services procured earlier on credit. Both these processes need to be in harmony with each other for the smooth running of the company. 

What are upstream and downstream accounts payable?

The upstream and downstream processes involve various steps involved in procurement and payables functions.

Upstream process

Upstream accounts payable, or procurement, is the first step in the procure-to-pay process. The procurement department of a company performs tasks such as:

• Vendor selection:

Selecting the correct vendor for your business is a challenging and essential task. Vendors are chosen based on the price, availability of goods and services, quality of goods supplied, and duration taken from ordering goods to receiving them. After a vendor is 

• Contract generation:

A contract is generated for recurring purchases from a vendor. The agreement contains details on when the goods will be delivered, the quantity and fixed price of goods to be provided, and termination clauses. Verifying the contract with the legal department before signing is also essential. Contract generation and negotiation are generally the responsibility of the procurement department. 

• PO generation:

When a vendor is selected to purchase goods, the procurement department generates a purchase order stating the quantity and type of goods or services required from the supplier. This is sent to the supplier for delivery. 

• Goods request:

After goods are requested from the supplier, the supplier and the company must ensure the quality and quantity of goods delivered before paying the bill. 

Downstream process

Paying your vendors is the downstream process of accounts payable. The downstream process consists of a set of roles and responsibilities involved. 

• Invoice received

After the goods or services procured have been successfully delivered, the vendor sends an invoice to the company's accounts payable department. Invoices are usually sent digitally in the form of mail to a centralized AP inbox or received via post to the company's PO box. 

• Invoice processing

After invoices are received by the AP department, it is their responsibility to process them and note down all invoice details before sending them for payment. Invoice details such as invoice number, invoice date, payment discounts, line item details, and due dates are noted in the accounting system. The invoice is then GL-coded and assigned to relevant cost centers. This is performed either manually or is automated using an invoice automation tool. 

• Approval process

Paying invoices without approval from relevant business heads can lead to fraudulent payments and monetary losses. Thus, it is the responsibility of the AP department to obtain approvals before processing these invoices. In case of any discrepancies noticed in the approval process, the AP team should raise the issue to the vendor immediately for rectification. 

• Payment generation

After invoices are approved and accounted for, they are paid via the vendor’s preferred payment method. Accommodating a payment approval process before funds leave the company is advisable to safeguard yourself from payment fraud. 

Stakeholders in upstream and downstream process

Two departments are mainly responsible for smoothly running upstream and downstream payables processes. The procurement and accounts payable departments must work harmoniously to achieve this. 

Procurement team

Since the procurement team is responsible for securing goods and services as per the company's requirement, they must gain the best deals from their suppliers with effective negotiation techniques and ensure vendor compliance. They should also maintain a good relationship with their suppliers by keeping an open line of communication. 

Accounts payable team

The accounts payable team receives, processes, and pays invoices. The accounts payable team should ensure all invoices are processed correctly and assigned to the correct GL accounts. They should also ensure that the approval process is followed and completed timely to prevent late payments and capture early payment discounts. 

Challenges in the smooth running of the AP process

Though optimizing both the upstream and downstream processes is a must for optimizing costs and controlling spend, getting these functions to work together can be challenging. Here are a few challenges that can hamper the smooth running of your AP processes. 

Siloed upstream and downstream processes

One of the significant challenges regarding the harmony between procurement and accounts payables functions is how siloed they tend to be. Accurate cost control can be hard to achieve with both departments following their separate goals or duties. To optimize your financial processes, sharing goals and strategies between procurement and AP teams is crucial. 

Incomplete data

Another challenge when optimizing the accounts payable process is separate databases or incomplete data between departments. For example, a lack of information about a set contract between a vendor and the procurement team might lead to overpayment on non-contracted invoices by the AP team. 

Poor vendor communication

Poor vendor communication is also a big issue regarding the smooth running of the entire procure-to-pay process. Misinformation about the contract terms, when an invoice is to be paid, or the number of products delivered can pose a problem when procurement or payments are considered. 

Inefficient approval workflows

Not obtaining proper bill or payment approvals can also make you susceptible to fraud or duplicate payments. Moreover, invoices stuck in approval can cause delays in payments and missed early payment discounts or late payment fees. 

AP automation: The one-step solution to improve upstream and downstream processes

Implementing AP automation can help you bridge the gap between procurement and accounts payable functions and fully optimize your procure-to-pay process. AP automation can help accountants save time on manual AP tasks and concentrate on more strategic charters. It can also reduce manual errors involved in invoice data extraction. AP automation vendors like ClearTech also require invoice, payment, and vendor approvals before processing any invoices, ensuring no funds are moved before proper approvals are in place. With interactive AP, savings, and spend dashboards in place, both procurement and AP teams can easily view the inefficiencies in their processes and aim to improve them. Vendor dashboards also show how much a vendor has been charging over time, letting you know the correct time to switch vendors. 

Conclusion

• The upstream process in accounts payable refers to procurement of goods and services by a company.
• The downstream process refers to the accounts payable or vendor bill payment function. 
• For an efficient procure-to-pay process, both these processes should work in harmony with each other. 
• Problems such as siloed processes, lack of communication between the departments and vendors, inefficient approval workflows and incomplete availability of information with both departments can hinder the P2P process of a company. 
• Employing AP automation solutions can help reduce manual workload off your AP department, allowing them to focus on more strategic tasks and create a shared visibility between the procurement and payables department via interactive dashboards.