Understanding the accounts payable process

An invoice goes through various stages, from the moment a sale occurs to when you get paid. Understanding and managing every step efficiently can make a massive difference to your bottom line, especially in the case of new start-ups and small businesses. By understanding all the stages in the accounts payable process, you can improve your business performance.

Accounts processing steps

Step 1: Raising an invoice An invoice is not started when the seller generates it. It begins when the client puts in the order. Some businesses demand a Purchase Order (PO) as order confirmation. The PO evolves into an invoice and is immediately added to the accounts payable accounts. Whatever you use to record a customer order, ensure that you have accurately captured the necessary information to correctly invoice the customer and deliver the product if required. When dealing with larger organisations, it can sometimes be helpful to capture the individual’s name responsible for that order. The invoice template must contain essential details such as ABN, contact details, reference to the product/service, payment terms and conditions, and modes of payments offered. Step 2: Sending your invoice At the dispatch stage, an invoice is usually attached with the products and emailed directly. Emailing reduces the risk of delayed or lost posts and is well known to result in swifter payment. An invoice mostly ends up with the client’s accounts payable team and spends most of its life there. Ideally, it is paid within the requested payment period. But outstanding invoices are common, and chasing them is a hassle. That’s why trackable invoices are important. Accounts payable automation that alerts a business owner about overdue payments can offer a tremendous advantage to the business’s cash flow. If you don’t like making dreaded phone calls to chase your clients, try SMS and email reminders. They are particularly effective. Sometimes though, a direct call is unavoidable. Try calling the person you have recorded responsible for raising the order and making them your advocate within your customer’s business. Step 3: Chasing payments Don’t be afraid to enforce your payment terms to your clients. As long as your accounts payable terms are made clear when ordering, you must adhere to those timings strictly. Most companies employ accounts payable automation that ensures they learn of overdue payments as early as possible. Follow up on all outstanding invoices to ensure your business does not carry any additional financial burden. For quicker payments, opt for EFT, PayPal or other electronic payments. Clients prefer it too. It means less paperwork, sorting and storing. The more options you provide your customers to pay their outstanding invoices, the easier it is for them. And the more likely it is that you will be paid on time. Step 4: Receiving payments It is always comforting when payments are received. It ensures the business has the cash flow necessary to succeed. When funds arrive, it is vital to accurately match funds received with the correct client and the proper invoice. Irrespective of your sophisticated accounts payable process automation, there are always pitfalls of which to be aware. Be ready to manage complex invoicing issues like part payments or one payment covering several invoices.

Why monitor the invoice lifecycle?

By understanding and observing the various stages, you can improve internal processes. If there is a time lag between creating the invoice and dispatch, how can you reduce it? Create and use reports that are available in your accounts payable process to your advantage. Look for patterns such as seasonality. If you know clients are slower payers in December, make sure your business has the cash flow reserves to get you through to January. By understanding the patterns of various stages, you can make informed decisions about frequency, speed, and payment patterns.

A few accounts processing tips that might help

You don’t need to have sophisticated accounts payable automation to discern some critical information that you can use to grow your business. These few tips might help you use the data from your accounts processing operations to assist your business. Reward timely payers Thank customers for their order and their timely payment. Encourage clients to make up-front payments and reward them for their support, possibly with a small discount. Don’t always use a discount as a reward as this may be seen as a permanent change in your pricing. Manage debts Be vigilant. Always keep an eye on a client’s total amount owed. Keep it as low as possible. Always know how much is outstanding. Apportion outstanding amounts to each customer and report how long it’s been due for. Listen out for any communications that may indicate a client is struggling to pay their invoices. Do not extend credit to customers who have significant outstanding debts, however attractive that order may be. Save money Managing the processing of your account may seem arduous. But don’t give up too soon. Equip yourself with a basic understanding and employ the right tools. Improved control over your invoicing leads to much healthier cash flow. And a healthier cash flow is what you need to build a successful business.

Accounting and Finance