An optimized accounts payable (AP) process is crucial for managing cash flow effectively and taking advantage of discounts and favorable payment terms. Collaboration with other departments is essential for achieving process excellence in AP.
The cycle time to approve and schedule payments in AP is a good example of how collaboration impacts effectiveness. This cycle time measures the duration it takes to receive, enter, approve, and process a vendor invoice for payment. Top-performing organizations can complete these tasks in 2.8 days or less, while bottom-performing organizations take a week or longer.
Why is it important to improve cycle time? Organizations often have idle cash available for a short period and must decide how to best utilize it. By improving cycle time, organizations can take advantage of prenegotiated discounts on vendor payments and earn better returns on idle cash. However, bottom-performing organizations may miss out on these opportunities.
An inefficient AP process also poses risks during the year-end financial close, leading to inaccuracies in period-end accruals.
To improve cycle times and overall AP performance, the AP department should:
- Standardize and centralize AP processes.
- Assign process owners for each AP process.
- Continually seek opportunities to remove waste and inefficiencies.
Improving AP performance also relies on collaboration from other departments. Here are three ways the rest of the organization can support AP efficiency:
- Timely Submission of Invoices: Ensure vendor invoices reach AP personnel promptly to maintain routine process flows and avoid disruptions. Provide comprehensive information, including expense codes and relevant details related to expense categories, departments, and locations.
- Obtaining Approvals Before Submission: Obtain all necessary approvals before submitting invoices to avoid delays. If specific approvals are required, ensure they are obtained to prevent AP personnel from spending time tracking down approvals later.
- Batching and Processing Payments: Aim to enter invoices into the payables system and process payments efficiently. Consider upgrading to newer financial ERP systems or explore alternatives like payment batching, ACH/electronic payment options, or more frequent payment schedules.
By implementing standardized systems, fostering collaboration, and optimizing AP practices, organizations can enhance cash flow management and ensure the smooth functioning of crucial financial processes.
Top Organizations Record Accounts Payable Cycle Time in 2.8 Days: Metric of the Month (cfo.com)
