Accounts payable (AP) is an essential function in any business, ensuring that payments to suppliers for goods and services are processed accurately and efficiently.
While it may seem straightforward, managing accounts payable effectively involves multiple steps and considerations.
This guide will walk you through the entire accounts payable process. Along the way, we’ll answer key questions about accounts payable and explore practical examples to help you master this critical function.
Jump to
What is accounts payable?
The accounts payable process: Step by step
A day in the life of working with accounts payable
Why accounts payable matters
Common questions about accounts payable
How to enhance your accounts payable processes
Final thoughts
What is accounts payable?
At its core, accounts payable refers to the process whereby businesses manage their outgoing payments to suppliers for goods and services that have already been received.
Unlike cash transactions, accounts payable often involves trade credit, where payments are due at a later date—15, 30, or even 90 days after an invoice is issued. This delay allows businesses to manage cash flow by generating revenue from the goods or services before making payments.
For example, you may want to sell soup at a festival. To sell these meals you will need vegetables from a local supplier to make the food, maybe fresh bread from a bakery, and napkins and bowls from a wholesaler. The problem is, you don’t have the money to buy these goods yet, you haven’t sold any soup. The suppliers therefore give you the products upfront and payment terms typically 30 days in the future to repay them. You go to the festival, sell the soup at a considerable profit, and repay your supplier in accordance with the agreed payment terms.
This is a simplified explanation. However, accounts payable is not just a single transaction; it is a structured process involving documentation, approvals, and reconciliations. In the next section let’s break down this process step by step.
The accounts payable process: Step by step
1. Purchase orders (optional)
For medium to large businesses, the accounts payable process often begins with a purchase order (PO). A PO is essentially a reverse invoice: it’s a document sent to a supplier to approve the purchase of goods or services. While this step is optional for smaller businesses, it provides an additional layer of budget control and clarity.
2. Invoice capture
Once the goods or services are delivered, the supplier sends an invoice to the business. This invoice must be captured and recorded, either manually or through software, into the accounting system. For businesses receiving a high volume of invoices, automating this step can save time and reduce errors.
3. Approval process
Before payments are made, invoices must be reviewed to ensure they are accurate and legitimate. This could involve checking that the goods or services were received as ordered, matching the invoice with the corresponding PO, and confirming approval from relevant stakeholders.
4. Payment execution
Once approved, payments are executed. This involves logging into the business bank account, processing payments manually or through bulk uploads, and reconciling the transactions in the accounting software. Efficient payment execution minimises delays and errors.
5. Remittance advice (Optional)
To maintain transparency and build trust with suppliers, businesses often send a remittance advice—a notification that payment has been made. This is especially useful for larger organisations making bulk payments.
A day in the life of working with accounts payable
Meet James, the general manager and chef of The Table, a restaurant in Edinburgh. James oversees the restaurant’s finances, including accounts payable. Here’s how the process works for him:
- Placing orders. James sends a purchase order to Eliza, the owner of Edinburgh Wines, requesting an order of 100 bottles of wine.
- Prepayment request. Since James is a new customer, Eliza requests a 50% prepayment before dispatching the wine. James raises the PO in his accounting software and logs into the bank to make the payment.
- Invoice receipt. Once the wine is dispatched, Eliza emails the invoice to James, who forwards it to his accountant for processing.
- Approval check. The sommelier at The Table checks the delivery to ensure all bottles match the order and are undamaged.
- Payment run. The accountant schedules payments during the weekly payment run. This batch processing aligns with banking timelines and ensures efficiency.
- Reconciliation and remittance. After making the payment, James’ accountant reconciles the transaction in the accounting software and sends a remittance advice to Eliza for her records.
Through these steps, James ensures his suppliers are paid on time, maintaining good relationships while keeping his business running smoothly.
Why accounts payable matters
Accounts payable is crucial for maintaining financial health. It ensures bills are paid on time, strengthens supplier relationships, and helps optimise cash flow for better business management.
- Financial documentation. Every payment must have corresponding documentation for audit and compliance purposes.
- Cash flow management. By negotiating payment terms, businesses can align outgoing payments with incoming revenues.
- Supplier relationships. Prompt and accurate payments build trust and can lead to better terms or discounts.
Common questions about accounts payable
What is the difference between accounts payable and receivable?
Accounts payable involves payments owed by the business to suppliers, while accounts receivable refers to payments owed to the business by customers.
What is an accounts payable aging report?
An accounts payable aging report categorises your outstanding invoices by due date, showing which invoices are current and which are overdue. It helps prioritize payments and manage cash flow efficiently.
What payment methods should I use for supplier payments?
The best payment method depends on your business needs and supplier preferences. Common methods include:
- Digital payment solutions like Modulr AP to automate and streamline accounts payable.
- Bank transfers.
- Credit cards for smaller or more immediate payments.
Challenges in accounts payable
Despite its importance, managing accounts payable can be challenging. Common issues include:
- Manual processes. Time-consuming and error-prone manual data entry can lead to inefficiencies.
- Disputes. Discrepancies between invoices and deliveries require resolution before payments can be made.
- Cash flow strain. Poor timing of payments can create cash flow challenges, especially for small businesses.
How to enhance your accounts payable processes
Managing accounts payable doesn’t have to be a time-consuming or error-prone process. Modulr simplifies and automates key aspects of accounts payable, empowering growing businesses to focus on scaling their operations without getting bogged down in administrative tasks. Here’s how Modulr can transform your AP process.
1. Automated invoice processing
Manual data entry is a leading cause of inefficiencies in accounts payable. Modulr integrates seamlessly with accounting software to automate invoice capture and approvals. This ensures invoices are processed accurately and on time, reducing errors and freeing up you and your team.
2. Streamlined payment execution
With Modulr, you can schedule and execute payments directly from your accounting software, eliminating the need for manual uploads or logging into separate bank accounts. Batch payments are handled effortlessly, and you gain real-time visibility into your cash flow.
3. Enhanced cash flow management
Modulr’s smart payment scheduling tools help you optimise your cash flow by aligning payment deadlines with incoming revenues.
4. Built-in compliance and security
Modulr ensures all payments are compliant with UK financial regulations, providing audit-ready documentation and robust security measures. You can trust that your financial data and transactions are protected at every step.
5. Supplier trust and transparency
Generate and send remittance advice automatically to suppliers, fostering trust and transparency. Modulr’s tools make it easy to keep your suppliers informed and ensure that payment disputes are minimised.
6. Scalable solutions for growing businesses
As your business grows, Modulr scales with you. Whether you’re handling payments for a handful of suppliers or managing complex payroll, Modulr’s solutions are designed to adapt to your needs.
Final thoughts
Accounts payable is a vital function that ensures the smooth operation of businesses. By understanding and optimising the AP process, businesses can maintain financial health, strengthen supplier relationships, and enhance operational efficiency. Whether you’re a small business owner or a financial professional, mastering accounts payable is an essential step in your journey toward success.
