Accounts payable (AP or “payables”) are essential to any business, but they’re especially critical for growing companies with extensive networks of vendors, service providers, and other strategic partners.
In particular, determining how to reduce accounts payable to the minimum possible monthly or quarterly financial strain is the ticket to rapid, sustainable growth. But time-intensive processes, high costs, and other challenges stand in the way of effective and impactful AP process efficiency.
Below, we’ll discuss some tips and tricks for reducing AP costs and making AP management as efficient as possible. We’ll explain accounts payable best practices and examine some key benefits of accounts payable automation.
Analyze your accounts payable process
To reduce AP costs and streamline AP processes, you must first understand how accounts and payments are managed. This means mapping out your AP process to identify bottlenecks and inefficiencies.
You’ll need to evaluate all recent and outstanding purchase orders; terms and conditions across all accounts, forms and funnels used to process, track, and pay bills; and channels used to communicate externally and collaborate internally with other business segments.
No matter a company’s size, any business owner will benefit from greater visibility.
You can begin consolidating steps and eliminating unnecessary processes with an accurate inventory. For example, repeat approvals for long-standing accounts are likely unnecessary. You should also eliminate any other excessive communication loops or inefficiencies that lead to repayment, lateness, or other errors.
Streamline invoice processing
After determining your biggest pain points, you should look for ways to eliminate them through simplification. Using uniform documents and channels minimizes variables and makes the process seamless for all parties.
Accounts receivable processes include but are not limited to:
- Capturing invoices, purchase orders, and other billing requests
- Approving payment amounts, recipients, and other terms
- Authorizing payments from specific counts on specific dates
- Executing payments and ensuring they’re delivered
- Collecting, analyzing, and reporting on payment data
There are natural synergies and efficiencies to exploit across these, like automating approval for repeat orders of the same kind or from the same vendor. Rigorous data analysis can unveil other streamlined ways, like building reporting into execution.
However, in practice, this can be more challenging than it sounds. One paradox of contemporary payment infrastructure is that easy user experiences for clients come at the expense of complexity on the provider side.
According to McKinsey, simple payment interfaces belie complex backends, meaning that accounts get decoupled from payments and value chains become fragmented, endangering operations.
This is why one of the most impactful accounts payable best practices is setting up a centralized, standardized database that keeps data correlated and coordinated.
Negotiate with vendors for better terms
Invoices inherently involve both internal and external stakeholders. Optimizing accounts payable processes can and should involve negotiating with your partners for mutually beneficial terms. Terms that may appear favorable for just one side (i.e., longer and/or more regular pay cycles) can benefit all parties with greater visibility and projection for each side’s finances.
For your part, these terms directly impact cash flow and operational efficiency, reducing the burden on accounts payable management. Negotiating for longer payment terms adds flexibility in navigating slower seasons, other forms of variance, and potential savings in early payment discounts.
In addition, you should work to explain the differences between in-person and electronic payments to vendors and convince any who (still) require the former to upgrade. As with regularity, virtual payment methods allow for greater visibility, with added benefits to security and efficiency in reporting and data analytics.
You need a strong relationship with vendors and a willingness to compromise or concede on their requests to benefit from these negotiations.
Improve communication and coordination
Communication is essential to effective negotiation, and transparency is the key to communicating effectively with external parties like vendors and service providers.
However, optimized AP management also depends on effective internal communication, which enables team coordination and collaboration. You should train all staff impacted by accounts payable matters to ensure they are aware of and vigilant about reporting and other best practices when managing vendor payments.
If a salesperson or other client-facing team member notices something during a call or meeting with an external party, they should feel empowered to notify accounts payable about the potential impacts on present or future billing.
Another reason communication is so important in and around accounts payable is that it’s one of the best buffers against fraud, one of the biggest challenges to AP processes. Better visibility and transparency limit its likelihood and potential impact. In particular, better communication within the treasury and across its connections with other departments helps secure automated and virtual payments effectively.
Schedule payments and manage cash flow
To the greatest extent possible, accounts payable should enact regular payment schedules that make cash flows predictable in the long term. While some expenses will necessarily be erratic, every payment should be scheduled and planned ahead of time.
This level of preparedness also allows for prioritization or conscious choices about which accounts and orders should be paid first based on operational or other strategic needs.
For example, a higher priority might be assigned to a vendor that offers more long-term value than a one-time payment to a supplier.
Another benefit of coordinating AP schedules is avoiding crunch times. Budgetary and time constraints can force a company into disadvantageous financial decisions, like missing a payment deadline or a threshold for a discount or borrowing against a worse interest rate due to inopportune timing. Prioritization mitigates these risks.
Scheduling and especially prioritization help you monitor working capital effectively.
At the most advanced end of the scheduling spectrum, payment automation can supercharge growth by making a payment schedule self-actualize over time.
Monitor opportunity performance to reduce costs
As noted above, reporting and data analysis are key to improving accounts payable processes. Receiving and paying invoices is insufficient; you must also monitor payments for threats and opportunities to optimize AP and overall operations.
Two key performance indicators (KPIs) to monitor for accounts payable are:
- Average days to pay (ADP): A simple yet holistic measure of how long an invoice takes from its initial intake to full payment.
- Invoice processing time: A granular look beyond the balance sheet at the time an invoice or purchase order spends in internal processing, with insights into which processes take the most time and what factors are at play in each.
All data entry and processing relevant to AP processes and management need to be audited regularly to detect trends and opportunities. For example, vendors that send many individual invoices might be incentivized to use bulk payments. You might also leverage more innovative approaches, such as multi-invoice batch payments.
The best accounts payable software has built-in monitoring, ideally automatically.
Embrace AP automation software
Maybe the best and easiest way to streamline account payable management is to use account payable automation (AP automation). AP automation is a boon to accuracy, cost savings, and overall efficiency because it reduces the need for manual processes. This minimizes the likelihood of costly errors and makes timely or even early payment—and the discounts it can bring—easier to nail consistently.
Automation makes every best practice above easier to achieve. It leverages uniform documentation and channels to simplify processes, provides greater transparency that facilitates external and internal communication, takes scheduling to its logical conclusion, and provides data analytics tools for enhanced monitoring.
AP automation software streamlines everything from invoice approval to payment execution, including follow-up adjustments and reporting.
Reduce your accounts payable with WisePay
Learning to reduce accounts payable is about minimizing costs and maximizing accuracy and efficiency in AP processes. In turn, small businesses will see increased cash flow, improved relationships, and a clearer path to rapid, sustained growth.
These benefits are enhanced further with AP automation using a revolutionary platform like WisePay. Our automated invoicing and payment processing solutions help reduce labor costs, cut AP costs, ensure consistent accuracy, and enhance cash flow and projections to supercharge your operations.
Learn more about WisePay to see how your business can benefit.
