Accounts Payable (AP) represents the amount that a company owes to its creditors and suppliers (also referred to as a current liability account). Accounts payable is recorded on the balance sheet under current liabilities.
When a business purchases goods or services from a supplier on credit, payment isn’t made straight away, but is due within 30 days, 60 days, or in some cases even longer. In the first instance, the company will send the supplier a purchase order, after which the supplier will provide the goods purchased together with an invoice requesting payment by a certain date. When the amounts owed to suppliers and other third parties are not paid within the agreed terms, late payments or defaults occur. This could be due to inefficient invoice processing or challenges within the supply chain.
A key metric when talking about accounts payable is Days Payable Outstanding (DPO). This is used to describe the number of days that a company takes to pay its suppliers. The higher a company’s DPO, the longer it is able to make use of its available cash. Consequently, some companies may choose to extend the payment terms offered to their suppliers in order to improve their working capital position.
Accounts Payable Automation
Accounts payable or AP automation is the ongoing effort of many companies to streamline the business process of their accounts payable departments. The accounts payable department's main responsibility is to process and review transactions between the company and its suppliers. In other words, it is the accounts payable department's job to make sure all outstanding invoices from their suppliers are approved, processed, and paid. Processing an invoice includes recording important data from the invoice and inputting it into the company's financial, or bookkeeping, system. After this is accomplished, the invoices must go through the company's respective business process in order to be paid.
This process is straightforward but can become very cumbersome, especially if the company has a very large number of invoices. This problem is compounded when invoices that require processing are on paper. This can lead to lost invoices, human error during data entry, and invoice duplicates. These and other problems lead to a high cost per invoice metric. The goal of automating the accounts payable department is to streamline this invoicing process, eliminate potential human error, and lower the cost per invoice.
Some of the most common AP automation solutions include E-invoicing, scanning and workflow, online tracking, reporting capabilities, electronic invoice user interfaces, supplier networks, payment services and spend analytics for all invoices.
Electronic Invoicing can be a very useful tool for the AP department. Electronic invoicing allows vendors to submit invoices over the internet and have those invoices automatically routed and processed. Because invoice arrival and presentation is almost immediate invoices are paid sooner; therefore, the amount of time and money it takes to process these invoices is greatly reduced. (Financial Operations Networks, 2008) These solutions usually involve a third party company that provides and supports an application which allows a supplier to submit an electronic invoice to their customer for immediate routing, approval, and payment. These applications are tied to databases which archive transaction information between trading partners. (US Bank, Scott Hesse, 2010) The invoices may be submitted in a number of ways, including EDI, CSV, or XML uploads, PDF files, or online invoice templates. Because E-invoicing includes so many different technologies and entry options, it is an umbrella category for any method by which an invoice is electronically presented to a customer for payment.