Understanding accounts payable: definition, process and best practices

What is accounts payable?

Accounts payable (AP) refers to the money a company owes to its suppliers and vendors for goods and services received but not yet paid for. It’s a short-term debt that’s recorded on the company's balance sheet and must be settled within the time outlined by the payment terms in the contract. 

Proper management of accounts payable is extremely important for companies, as it goes a long way in dictating supplier relationships, operations and the overall financial health of the business. 

In this article, we’ll go over the fundamentals of accounts payable, break down the typical AP process and highlight best practices for managing AP workflows efficiently. We’ll also discuss common challenges in AP management and how AP automation tools can help streamline AP workflows, reduce costs and improve accuracy.

The accounts payable process end-to-end 

There are six key steps in the accounts payable process. Understanding – and perfecting – this process is key for maintaining efficiency and accuracy in financial operations.

Step 1: Receiving invoices

Once a company receives an invoice from a supplier or vendor, the AP process begins. Invoices will arrive via one of the following:

• Email
• Mail
• Electronic invoicing systems

Before moving on to step two, it’s paramount to confirm the invoice details align with the purchase order and receiving report. 

Step 2: Invoice approval

After an invoice is received, it must go through an invoice approval workflow. This is a process that ensures proper review, verification and approval of invoices, while maintaining compliance with company policies and procedures.

Depending on the type (and size) of invoice, this could require multiple departments and often needs confirmation that:

• The goods/services have been received in full
• The supplier's invoice, purchase order and delivery receipt match (commonly known in practice as a 3-way matching)
• The pricing and terms are accurate

Step 3: Invoice coding

Following 3-way matching and approval, invoices are assigned with codes or identifiers, which may be a series of letters, numbers or a combination of both. These codes allow AP teams to assign the correct general ledger account and cost center to invoices.

Invoice coding isn’t much more complex than the type of labeling you’d see in a grocery or retail store. 

It’s simply a way for businesses to categorize and organize their expenses (e.g. office supplies, rent, marketing), so when they do financial planning and reporting, they can see exactly what they’re spending in certain areas, what they got in return for it and make informed decisions from there.

Step 4: Payment scheduling

Once coded, invoices are scheduled for payment based on the company’s cash flow management strategy and the vendor’s terms of payment.  

Companies may prioritize early payment discounts or adhere to standard payment terms (like net 30 days) to maintain healthy vendor relationships.

Step 5: Payment processing

On the scheduled payment date, the AP team processes the payment using their chosen payment method, such as: 

• Electronic funds transfer (EFT) – aka direct deposit
• Automated Clearing House (ACH)
• Wire transfer
• Check

At this stage, staying compliant with company policies and remaining vigilant against fraud is critical, so proper documentation and authorization are required.

Step 6: AP reconciliation

Once payments are made, the final step is to update the accounting records and compare the AP ledger with the general ledger. This step helps identify and reconcile any differences, ensuring accuracy and maintaining a clear audit trail. AP teams, controllers, or CPAs most often carry out reconciliations manually or use AP automation software to automate a lot of the process. 

Best practices for managing AP workflows efficiently

The most effective AP processes are streamlined, accurate and cost-efficient. Here are a few best practices for accounts payable management that can help you get there:

Implement a centralized AP system

A centralized AP system integrates all accounts payable activities into a single platform – automating repetitive tasks like data entry, invoice routing, approvals, and payment reconciliation. This approach helps standardize processes, provides greater visibility and control over spending, and enhances collaboration across departments. By having a single source of truth for all AP activities, departments like procurement and accounting can work together seamlessly to ensure timely payments, identify spending trends, and maintain regulatory compliance.

Automate invoice processing

AP automation tools can significantly improve the efficiency of invoice processing. By leveraging technologies such as optical character recognition (OCR) and machine learning, companies can automate data entry, reduce manual errors and speed up the approval process. When considering an AP automation solution, businesses should look for features like OCR invoice capture, three-way matching and electronic approvals. These features help reduce the risk of duplicate payments and errors, and allow the AP teams to focus on higher-value activities, like analyzing spending patterns or investigating invoice exceptions. 

Standardize payment terms

Consistency is key. Establishing standardized payment terms with suppliers and vendors can simplify the AP process and improve cash flow management. Clear and consistent payment terms help prevent disputes and ensure timely payments.

Use early payment discounts

Taking advantage of early payment discounts often offered by vendors and suppliers can potentially result in significant cost savings. Companies should evaluate their cash flow and strategically schedule payments to maximize the benefits of these discounts and improve the bottom line.

Regularly review and reconcile accounts

Regularly reviewing and reconciling accounts payable records helps identify discrepancies early on. This proactive approach prevents fraud, strengthens internal controls and ensures financial statements are accurate and audit-ready.

Train and support AP staff

Investing in the training and development of AP staff is crucial for maintaining an efficient and knowledgeable team. Providing ongoing support and resources helps employees stay updated on best practices and new technologies.

Common challenges in AP management

Companies often face challenges in managing their accounts payable process even with a solid financial system in place. For instance, invoices might get lost or misplaced, approvals can take too long, or mistakes can happen when entering data by hand, which can slow down the whole AP process and make it difficult to track spending accurately. Identifying and tackling these challenges is important not just to boost the productivity and precision of the AP team, but also to prevent financial discrepancies and ensure the business pays bills on time – exactly what it owes. Here are some of the most common challenges the accounts payable teams face:

Manual processing errors

Entering and processing data by hand sometimes leads to errors, misinterpretations, or oversight. These mistakes often cause payment delays, lead to discrepancies in financial statements, and can hurt relationships with suppliers too. Implementing automation tools significantly reduces these errors and enhances overall efficiency.

Delayed payments

Delayed payments result from various factors, including slow processes, lack of visibility, and approval bottlenecks. Timely payments are crucial for maintaining good supplier relationships and avoiding late payment penalties.

Fraud and compliance risks

AP processes are susceptible to fraud and compliance risks, such as unauthorized payments and regulatory violations. Implementing robust security measures and maintaining accurate records can help mitigate these risks.

How AP automation tools can help

Speed or accuracy? 

Luckily, you can enjoy both with a single solution. Today’s automation tools offer significant benefits for managing the accounts payable process, and the best are both fast and accurate.

For example, ZoneCapture, an AP automation solution for NetSuite, connects to your cloud ERP and helps you scan and create vendor bills and credits and pay your vendors automatically using GenAI OCR technology without needing to ever leave your ERP. It  allows you to: 

• Reduce manual entry by up to 83% 
• Eliminate human error 
• Capture and process invoice data from PDFs and e-invoices directly inside ERP
• Enhance visibility and control
• Reduce costs and improve accuracy
• Enhance your existing NetSuite workflows and customizations as standard

Practical tips for implementing AP automation

Before you decide to automate your accounts payable and invest in an AP automation solution, take a close look at your current accounts payable workflows and think about what the ideal AP system in your company would look like. Here are some practical tips to follow:

1. Evaluate your current AP process: Conduct a thorough assessment of your existing AP workflows to identify areas for improvement. Consider the following:some text
   1. What accounts payable processes would you like to be automated? Think about repetitive tasks like invoice data entry, invoice routing and approvals, and payment processing.
   2. What is the average monthly volume of vendor bills? Do they include multiple line items, foreign currencies, or complex approval workflows?
   3. Is it financially reasonable for your business to invest in AP automation? Try our online calculator to estimate the potential return on investment (ROI).
2. Choose the right automation tool: Select an automation tool that integrates seamlessly with your existing systems and meets your exact needs.
3. Train your team: Provide comprehensive training to your AP team to ensure they’re equipped to use the new tool effectively.
4. Monitor and optimize: Continuously monitor the performance of your automated AP processes and make adjustments as needed to optimize efficiency and accuracy.

AP automation case study: what it looks like in action

Implementing automation tools like ZoneCapture can have a transformative impact on AP processes – and businesses as a whole. 

One example is Escalante Golf, a leading golf management company that has reduced invoice processing time by 70% every month with ZoneCapture.

Escalante Golf was in search of an AP automation solution after manually uploading and coding ~8,000 invoices per month into NetSuite became too slow and burdensome. After all, that equated to spending about 300 hours each month on invoicing alone, leaving their finance team with very little time to focus on other strategic initiatives. 

With ZoneCapture, Escalante Golf was able to replace many manual AP operations with automated processes and smart functionalities such as auto-learning, OCR and generative AI. 

This significantly improved the efficiency and effectiveness of their accounts payable team in multiple ways – from gaining more clarity and control over data to enhancing financial accuracy compliance. But perhaps the most newsworthy improvement has been the reduction in time per invoice, which has gone from two and a half minutes per invoice to 45 seconds.

By understanding the AP process, implementing best practices, and leveraging automation tools like ZoneCapture, companies like Escalante Golf are streamlining their workflows, reducing costs and improving accuracy. 

For more information on how Zone & Co’s platform of cloud ERP apps can enhance back-office operations at your organization, book a demo today.

FAQs about accounts payable

What is accounts payable?

Accounts payable (AP) refers to the amount of money that a business owes to its suppliers or creditors for goods or services purchased on credit. It represents the short-term liabilities of a company, indicating the amount it owes to vendors, suppliers or service providers for goods received or services rendered but not yet paid for.

What’s the difference between accounts payable vs. receivable?

Accounts payable (AP) are amounts a company owes to its suppliers for goods and services received but not yet paid for, recorded as current liabilities on the balance sheet. Accounts receivable (AR) are amounts owed to the company by its customers for goods and services provided on credit, recorded as current assets. AP reflects the company's obligations to pay, while AR represents claims to receive payment.

Is accounts payable a credit or a debit?

Accounts payable is recorded as a credit in accounting records, reflecting an increase in liabilities when the company owes money to its suppliers.

Is accounts payable a current liability?

Yes, accounts payable is considered a current liability on a company's balance sheet. Current liabilities are obligations that a company expects to settle within one year or within its normal operating cycle, whichever is longer. Accounts payable represent amounts a company owes to its suppliers or vendors for goods and services that have been received but not yet paid for.

What is an accounts payable turnover ratio?

The accounts payable turnover ratio is a financial metric that measures how quickly a company pays off its suppliers or vendors during a specific period. It’s an indicator of a company’s short-term liquidity and its ability to manage its cash flow efficiently. A higher turnover ratio suggests that a company is paying its suppliers more quickly, while a lower ratio indicates slower payment, which could be a sign of cash flow problems or a strategy to optimize cash reserves.

What are accounts payable job titles?

Accounts payable job titles include: Accounts Payable Clerk, Accounts Payable Assistant, Accounts Payable Specialist, Accounts Payable Coordinator, Accounts Payable Analyst, Accounts Payable Supervisor, Accounts Payable Manager, Accounts Payable Director, Accounts Payable Accountant, Procure-to-Pay (P2P) Specialist, AP Automation Specialist.