Small businesses which process accounts payable invoices in a timely manner will minimize total invoice processing costs.
Small business-especially those that are on the cash basis for tax purposes-should pay close attention to their accounts payable.
Paying bills prior to year end allows companies to deduct expenses at year end. Even though there is no “money in paying bills”, companies need to understand the accounts payable process in order to ultimately enhance their cash flow, as well as liquidity management.
Accounts payable is a necessary function of financial flow, and although there’s no money in paying bills, proper vendor management is vital to the success of any business or organization. This article will outline some best practices for business and organizations to utilize in improving their accounts payable process.
For small businesses, managing accounts payable can often times prove to be a complicated task due to having insufficient processes set in place.
Common challenges associated with poor accounts payables management include (among many):
- Manual routing of invoices
- Too much paper
- Lost invoices
- Lost discounts
- Duplicate payments
- Slow approvals
- Manual data entry
Poor accounts payable management ultimately increases the cost to process invoices. Evidence of this statement can be found in a 2011 study conducted by the Aberdeen Group.
The study revealed:
The average time and costs to process one invoice for companies in the top 20%, middle 50%, and bottom 30% of accounts payable performance was 3.8 days and $3.09, 9.7 days and $15.61, and 20.8 days and $38.77, respectively.
The study also found that the longer it took for a company to process invoices the less likely a company was to have attained discounts associated with early payments.
The takeaway from this study is that small company’s should be focusing on improving their account payable process in order to keep the cost of invoice processing as low as possible and capitalize on any early payment discounts.
How can businesses improve their accounts payable process?
Businesses must instill a system that keeps track of all vendor invoices and approvals. Whether invoices come in the form of mail, email, or fax, companies must have an efficient process to aggregate all the data into a centralized database that digitally keeps track of all invoices.
With a centralized system invoices can be electronically routed to the proper parties for approval, thereby saving time and establishing accountability. Companies can also develop their own criteria for sorting out invoices in order to ensure that there are no duplicates and lost payments.
Next page- The benefits of having a strong accounts payable process.
About the author
Alexander J. Hart of Cuban American decent is principal and founder of Hart Vida Raffo. With over 25 years of experience, Alex specializes in the areas of tax strategy and planning, business process improvement, and capital consulting. Whether advising on capital and financing strategy or consulting for privately-held professional services firms, Alex has the expertise and practical know-how to help any company optimize their business processes and make tactical financial decisions. He began his career at IBM in sales operations and accounting. He was a Controller for the N.Y. Post, has been a CFO for a medical device company, and has written a tax column called “Ask the Tax Guys” for Micro-Cap Review. Alex is a professional member of A.L.T.A. (Affiliated Lawyers of the Americas), a member of the National Association of Tax Preparers, and is a contributing author and mentor at Latin Business Today. Alex graduated from St. John’s University with a B.A. in Spanish and his M.B.A. in Finance. He obtained his accounting degree from Pace University.Website