Not following accounts payable best practices can result in duplicate payments, late payments and even fraudulent activity.
Accounts payable (AP) is prone to business fraud, given the high frequency of fraudulent payment requests through spam and other means. In many cases, employees are conned into making what they think are legitimate payments right into a fraudster’s hands. These cases occur far too frequently and often are not covered by business insurance.
But fraud risk doesn’t end with nameless con artists. The risks could be in house as well. Without proper internal controls, an employee could commit fraud intentionally by executing false transactions without oversight.
What Is Accounts Payable?
Accounts payable is an amount due to a vendor or supplier that has provided goods or services to your company. It’s a company’s obligation to pay its vendors on time.
AP is an area in your business that should be closely monitored, especially at a startup. Many startups can lack sufficient structure in their AP operations due to their focus being elsewhere in the company. Losing sight of the importance of AP can become a high risk for your startup if it isn’t handled properly, potentially exposing your company to degrading business relationships, bad information and errors in cash management.
Follow these accounts payable best practices to avoid succumbing to those risks:
- three-way matching
- standard operating procedures
- reviews and analytics
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Three-way matching refers to the process of reviewing all relevant documents prior to paying an invoice. The process verifies that the order of goods or services was authorized, received and approved for payment.
The accountant would collect and match the details of the following three documents:
- Purchase order or contract
- Delivery or service confirmation
If a discrepancy is found in the process, then it’s pertinent to follow up with your team and discuss what is missing and why there may be a variance. Mastering this accounts payable best practice will help ensure your company has good cash management and accurate records for decision making.
If your startup is in the early stages, this process might be too cumbersome to utilize right away. A good alternative is to simply stay organized and informed. To accomplish that, place all invoices in one spot, organized by time period and vendor. We highly recommend going paperless and storing all documents electronically. AP tends to have a high volume of transactions, so organization is key for an efficient and accurate process.
Lastly, always stay informed by verifying with the purchaser in your company to ensure the payment is accurate and authorized for goods and services received.
Establish Standard Operating Procedures
Once you have a process that works, document it as a standard operating procedure (SOP).
Creating an SOP ensures that the work is consistent, but also allows you to pivot seamlessly if the person doing the work changes. Be sure the SOP is comprehensive, including what steps are taken, what systems and documentation are used, what the review process entails and who has oversight of outgoing payments. This will mitigate risk of error or fraud in the process.
Implementing a consistent approach will also create a healthy relationship between the supplier and buyer. Establishing this kind of trust is very important in the beginning of a new relationship, especially in the startup world.
Review and Analytics
Financial reports and key performance indicators should be reviewed on a regular basis so that your startup is keeping tabs on cash flow and has a solid business decision-making strategy.
One of these reports should be an accounts payable aging report. This report will allow you to prioritize which invoices need attention first and stay consistent with making payments to vendors on time. If prioritizing payments are organized, then it will allow for solid vendor relationships, avoidance of late fees, piling up of invoices and in the end creating a cash problem for your operations.
AP is a pillar of the monthly close process, along with accounts receivable, cash and deferred revenue. The accounts payable best practices covered above also apply to these other pillars.
If you stay organized, establish consistent accounting operations practices, be proactive in cash management and always ensure some oversight to prevent error and fraud, you will be well on your way to sound financial operations to support your high-growth business.