Accounts Payable Process

Key Performance Indicators (KPIs)

Process Accounts Payable

Leading Practice/Benefits Approach

Leading Practice Approach

Develop strategic business alliances with  Identify potential supplier alliances. Create a
suppliers and involve them in developing better partnership with purchasing to evaluate
ways to process accounts payable. candidates.
Benefits  Focus on the largest suppliers. Define
 Allows suppliers to participate and cooperate objectives for identifying the best strategic
in joint quality, service and cost-control efforts business alliance candidates and then use
these objectives when choosing potential
 Gives suppliers the opportunity to become suppliers. Consider the following criteria:
involved in helping the company achieve
– Supplier size
payables strategic objectives
– Financial strength
 Provides the opportunity for reciprocal
participation in relevant training and – Current working relationship
educational programs sponsored by the – Reliability
company, suppliers and manufacturers
– Track record for process improvement
 Opens up channels of communication between
 Creatively design criteria to be included in the
suppliers and the accounts payable
partnership arrangement.
organization regarding:
– Value-added service capabilities  Initiate partnership arrangements with "good"
candidates. Arrange meetings to discuss
– New technologies capability and willingness to develop an
 Encourages and economically justifies the joint alliance.
development of technology linkages that are  Select partners and develop mutually agreed-
designed to increase efficiencies and reduce upon goals for the business relationship.
non-value-added elements (e.g., EDI
[electronic data interchange] and EFT  Search for process improvement opportunities
[electronic funds transfer]) that may be addressed with the formation of a
supplier partnership arrangement:
– Dissolves the traditionally adversarial
approach to conducting business in favor – Electronic data interchange (EDI)
of a spirit of cooperation – Electronic payments
– Invoiceless processing (pay upon receipt)
– Summary invoicing
 Support ongoing relationships with partners
through well-developed feedback mechanisms
designed to continuously improve the process.
Performance Measures

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 Process Accounts Payable

Leading Practice/Benefits Approach

 Qualitative assessments of vendor service

 Results of vendor surveys

Leading Practice Approach

Use summary invoicing from key suppliers.  Create a partnership with the purchasing
Benefits department and IT to evaluate current supplier
lists to identify potential candidates.
 With summary invoicing, customers are billed
daily, weekly or monthly depending upon their  Suggested criteria for evaluating suppliers for
volume of purchases. Summary invoicing summary invoicing includes:
combines numerous invoices per customer for – Good terms/relationship with company
payment purposes, rather than generating one – Volume of business between the
invoice per shipment. The company's companies (number of invoices)
remittance still shows invoices being paid or a
supplier reference number, but the supplier – Supplier's ability and willingness to
receives only one check. develop an adequate process
– Reduces payable transaction costs – Company's DPO (days purchasing
outstanding)
– Reduces personnel required
– Determine if high volume of invoices
– Reduces paperwork causes time delays in the company's
– Creates fewer lost and unpaid invoices payment process
– Decreases bank reconciliation time and – Accuracy and timeliness of suppliers'
costs accounts payable process
– Reduces postage costs – Possibility of negotiating better terms
– Offers potential to improve cash flow – With summary invoicing, the supplier may
be willing to renegotiate payment terms
(e.g., 2/15 net 30 instead of 2/10 net 30,
creating a better cash flow position for the
company)
– A gain in productivity
– Firms should conduct a cost/benefit
analysis for each supplier to determine
how many hours must be saved to make
the effort worthwhile
 Develop necessary requirements for summary
invoicing (e.g., determine how to handle the
allocation of shipping charges)
 Communicate necessary requirements openly
with supplier candidates. Institute a trial period
to test the implementation approach.
 Support ongoing relationships with partners

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 Process Accounts Payable

Leading Practice/Benefits Approach

through well-developed feedback mechanisms

designed to continuously improve the process
Performance Measures
 Number of checks processed/month
 Number of invoices received/month
 Number of invoices/month per supplier
 Number of invoice lines processed per
employee
 Discounts available
 Discounts taken

Leading Practice Approach

Empower and enable employees closest to the Section 1: Overall Approach
user to authorize supplier payment and charge
 Hold voucher preparers and approvers
appropriate accounts.
responsible for:
Benefits – Approval
 Reduces payables processing time and – Business reason
number of accounts payable personnel
– Adherence to company policy
 Reduces errors related to incorrect account
numbers – Proper account classification

 Builds quality and customer satisfaction – This advances an attitude of personal

discipline and continuous improvement for
 Aligns accountability with authority everyone involved in the payables function
– Lowers cost per transaction  Educate the accounts payable organization on
its responsibilities and the consequences of
not following company policy
 Employ total quality management (TQM)
thinking throughout the organization. Train
employees in TQM principles and tools. As an
example, the TQM process used by Company
X controllers is cited below:
– Identify the product a company creates
– Identify customers and determine what is
important
– Identify the company's needs
– Define the company's process (process
mapping)
– "Mistake-proof" the process and eliminate

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 Process Accounts Payable

Leading Practice/Benefits Approach

wasted effort
 Ensure continuous improvement by
measuring, analyzing and controlling the
improved process (including error rate
reporting and resolution)
 Provide approvers with a monthly
management report detailing vouchers certified
under their jurisdiction
 Review approval and authorization guidelines
to determine if changes need to be made
Section 2: Procurement Cards
 Procurement cardholders monitor spending
and reconcile their own accounts while
observing strict spending guidelines.
 This approach consolidates all small-ticket
items into one monthly invoice, instead of
potentially thousands of invoices and frees
accounts payable from reconciling individual
POs with invoices. Responsibility is shifted to
employees with procurement cards who:
– Call, fax or visit a supplier
– Pay with procurement cards issued in their
names
– Take delivery
– Reconcile accounts involving all items
purchased in their names
 Benefits of the card's use for this company
include:
– Elimination of receiving slips, purchase
orders and paper invoices
– Reduced need to rely on:
o Petty cash: tracking who uses it to
spend how much and where
o Employee reimbursement
o Audit trails for all purchases
o After-hours and emergency situations
availability
Performance Measures

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 Process Accounts Payable

Leading Practice/Benefits Approach

 Number of supplier inquiries and complaints

 Cost per transaction
 Percentage of accounts payable time spent
researching account numbers
 Percentage of purchase orders with
incomplete or missing account numbers

Leading Practice Approach

Edit (check arithmetic extensions, approvals,  Stratify vouchers by type and dollar amount
signatures and authorizations) only those
 Establish a materiality threshold for accounts
vouchers significant in dollar amount or
payable to use when reviewing vouchers
unusual in nature.
based on developed stratification levels
Benefits  Designate guidelines for mandatory voucher
 Reduces payables processing time review based on supplier's complexity or
 Lowers cost per transaction sensitivity. Perform edit checks electronically
when possible.
 Aligns accountability with authority
 Monitor number and type of errors; resolve
repeated problems expeditiously
Performance Measures
 Percentage of vouchers by type returned to
preparers
 Error rate
 Average amount of time spent editing
 Cost of edit per transaction

Leading Practice Approach

Evenly and efficiently distribute accounts  Understand the flow of work through the
payable workload based upon voucher department. Pay particular attention to:
complexity and materiality of payment. – Physical layout
Benefits – Work distribution to personnel:
 Reduced overtime levels o By supplier
 Lower cost per transaction o Alphabetically
 Reduced payables processing time o By complexity of voucher
o By time of receipt
– Error rates by individual, each subset and
total group

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 Process Accounts Payable

Leading Practice/Benefits Approach

– Overtime levels by person

– Productivity rates:
o Average time to process by person
and by voucher type
– Peaks and valleys in work schedule to
determine if work group is staffed to meet
peak needs
 Allocate workload evenly throughout the
department
 Allocation of the workload should also consider
processing requirements and be assigned in
such a way to maximize processing
efficiencies and individual abilities
Performance Measures
 Number of line items processed
 Number of errors identified
 Dollar value of identified errors
 Number of invoices per clerk, per month
 Number of suppliers per clerk
 Average invoice processing time
 Average number of invoices processed per
day

Leading Practice Approach

Set frequency of payments to suppliers based Section 1: Develop Payment Strategy
on supplier relations, discount policy and cash
 Observe how often checks are disbursed each
flow position.
week
Benefits
 Review payments made to key suppliers and
 Maximized cash flow track whether or not discounts were taken
 Reduced processing time  Monitor the cost per check based on personnel
 Lower interest costs costs of department, out-of-pocket expenses
and time value of money
 Improved liquidity
 Negotiate effective volume discount policies
 Better supplier relationships with suppliers
 Develop supplier payment strategies to
optimize cash flow impact (e.g., discounts
taken versus costs of delayed payment) which

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 Process Accounts Payable

Leading Practice/Benefits Approach

are consistent with vendor relationship

objectives
Section 2: Establish Payment Schedule
 Review cash flow projections and amounts
available for disbursement to vendors
 Generate and review daily management
reports of anticipated cash disbursements by
date, using the payment due dates of invoices
which have been approved for payment
 Prioritize importance of payments
– Communication between employees
responsible for establishing and
maintaining supplier relationships and
those responsible for treasury and
accounts payable will be necessary to
identify important payments and avoid
disputes with vendors. Decisions made in
any of these functions may impact the
timing and frequency of supplier
payments. Cross-functional teams may be
required to make these decisions.
 Payments should be scheduled to meet cash
flow and operating requirements
– Factors that should be considered when
scheduling payments include:
o Total net cash flow position and
requirements
o Supplier terms and relationships
o The number of times checks are
disbursed per week
o Negotiation of effective price discount
policies with suppliers rather than
volume or payment term discounts
o Cost per check based on personnel
costs of department, out-of-pocket
expenses and time value of money
o Optimization of cash flow impact –
discounts taken versus costs of
delayed payment
 Take advantage of discounts when

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 Process Accounts Payable

Leading Practice/Benefits Approach

appropriate.
– Discounts should be taken only if the
economics benefit the company
– Otherwise, defer invoice payments until
the due dates and possibly beyond to
maximize the use of cash
Performance Measures
 Overall cash flow
 Average payments terms
 Number of payments processed
 Savings on discounts versus savings due to
delayed payment
 Negotiation of effective price discounts
 Percentage and amount of available discounts
captured and lost
 Percentage of late payments to suppliers

Leading Practice Approach

Centralize accounts payable processing, but Section 1: Centralize Accounts Payable
decentralize accountability, error correction,
 Map the current processes
authorization and approval verification.
– A strong understanding of transaction
Benefits flows, employee responsibilities and
 Aligns accountability with responsibility processing requirements at each of the
 Defines an accounts payable group as a processing centers should be obtained.
processing unit When consolidating accounts payables
departments for several divisions or
 Reduces payables processing time subsidiaries of a company, it will be critical
to identify any unique requirements of
each business unit.
 Establish centralized standard processing
procedures
– Procedures should be developed which
eliminate any unnecessary steps to
minimize processing costs. Centralized
processing procedures should address:
o Transmission of processing
information to and from business units
o Authorization and approval

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 Process Accounts Payable

Leading Practice/Benefits Approach

requirements
o Vendor relationships and business
arrangements
o Account coding and data processing
o Exception resolution
o Management reporting and access to
information
Section 2: Decentralize Accountability,
Error Correction, Authorization
 Establish procedures that require individuals
responsible for originating the transaction to
authorize invoices and resolve exceptions
 Track errors and create an error rate report.
Post error rates by group and distribute to the
appropriate groups:
o What was the error?
o Why was the error made?
o Who made the error?
Performance Measures
 Error rate (number of errors per number of
opportunities for error)
 Average turn-around time from voucher
approval to payment
 Number of vouchers returned to originating
departments
 Number of errors
 Average number of vouchers processed

Leading Practice Approach

Integrate the purchasing, payables and  Understand current and projected accounts
receiving systems to increase efficiency and payable activities throughout the organization
prevent errors (e.g., automatic matching of
 Understand reporting and information
POs, receivers and invoices).
requirements
Benefits  Process map the accounts payable activities
 Integrated purchasing, payables and receiving performed and critically evaluate current
systems that are linked to all departments and policies and procedures to determine the
locations are a key element in a high-

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 Process Accounts Payable

Leading Practice/Benefits Approach

performer accounts payable function. An possibility of simplification or reengineering

integrated information system captures  Simplify the payables process by eliminating
information once, provides access to the identified non-value-added activities
information throughout the organization and
enables action when information is captured.  Automate activities with the highest potential
Some of the features of such a system include: benefit:
– Automatic matching of purchase orders, – Ensure capability for automatic matching
invoices and receipts of POs, receivers, approved vendors and
invoices
– Flexible payment scheduling
– Set up a discrepancy report to identify
– Supplier performance reporting
unmatched items
– Automatic accrual processing
 Critically assess hardware and software
– Exception reporting selection alternatives, including capabilities of
 Best companies review transactions on an the existing system, cost/benefits of
exceptions-only basis. Once the system modification or redesign and the potential for
identifies an exception, an accounts payable obtaining a new system. Emphasize
clerk can access the system and review accommodating integration with areas
documentation online, including purchase impacted by purchasing, payables and
order, invoice and receiving data. The terms of receiving, particularly:
the contract can also be accessed online. By – Department/branch requisitioning
having this information readily available on the
– Supplier systems
system, clerks are able to resolve exceptions
quickly and efficiently: – Bank systems
– Reduces the number of personnel in  Formulate and prioritize a systems integration
purchasing, payables and receiving and implementation plan for purchasing and
accounts payable
– Reduces payables processing time
– Eliminates duplication of functions  Provide required training and education to
payables and other appropriate personnel in
– Reduces paperwork the organization
– Improves payables accuracy  Form "users groups" to meet on a periodic
 Simplifies entry to the general ledger basis and assess opportunities for optimizing
system capabilities and productivity
 Reduces errors related to incorrect account
numbers, supplier numbers, part numbers, unit Performance Measures
of measure, etc.  Percentage of matched invoices
 Reduces need for future follow-up  Average number of days to resolve unmatched
items
 Number of invoice lines processed per
employee
 Number of days an invoice takes to process
 Accuracy of payables

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 Process Accounts Payable

Leading Practice/Benefits Approach

 Number of supplier inquiries and complaints

 Number of errors (incorrect part numbers,
supplier numbers and account numbers)

Leading Practice Approach

Utilize electronic data interchange (EDI) with Section 1: Overall Approach
suppliers for ordering, for price changing and
 Proactively reduce the number of suppliers
to accept receiving reports and invoices.
used (work with the purchasing department)
Where practical, use electronic payments.
 Consolidate the number of supplier files
Benefits
 Have a strategic plan for EDI. Identify and
 Improves transaction processing efficiency,
classify the activities most appropriate for EDI.
internally and with suppliers
Study the costs and benefits of instituting EDI
 Reduces personnel requirements for desired functions. Transaction numbers in
 Reduces frequency of errors EDI circles usually refer to EDI standard
transaction sets. The list below is a sample of
 Increases the productivity of payables transaction set numbers:
personnel by:
– Price/sales catalogue (832)
– Eliminating redundant data entry
– Request for quotation (840)
– Reducing paper handling
– Response for request for quotation (843)
– Reducing error resolution time
– Purchase order (850)
 Decreases paperwork
– Purchase order acknowledgement (855)
 Reduces supplier inquiries and complaints
– Shipping notice/manifest (856)
 Improves communications linkage with key – Payment order/remittance detail (820)
suppliers
 Evaluate the readiness of the corporate
 Solidifies supplier partnership system's infrastructure to send and receive
 Cost savings: EDI information
– Postage  Proactively identify EDI candidates (work in
– Check processing costs conjunction with the purchasing and IT
departments)
– Simplified treasury management function
– Suggested criteria include:
o Good terms/relationship with company
o Volume of business between
companies (number of invoices)
o Supplier's ability and willingness to
develop an EDI relationship
 Ascertain identified supplier's readiness to
send and receive EDI information and

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 Process Accounts Payable

Leading Practice/Benefits Approach

participate as an EDI partner

 Initiate a pilot program for EDI with selected
suppliers
 Implement the appropriate data and security
controls
 Provide required training and education to
purchasing, payables and other appropriate
personnel in the organization
 Employ a continuous feedback mechanism to
ensure optimal performance of EDI
Section 2: EDI for Payments
 Many organizations experience the following
advantages:
– Increased electronic payment volume with
a smaller accounts payable staff
– Improved T&E payment system, which is
now handled in-house for the first time
– Quicker response to vendor requests for
electronic payments via wire or automated
clearing house (ACH)
– Electronic payments and the savings they
realize leading some vendors to cut
charges to this company by as much as
four percent
– Reduced transaction costs
– Savings due to the elimination of bank
storage fees for PC transfer instructions
– Payment execution is three hours less per
day for groups involved
– An increase in wire transfers, including
those involving several payments per wire,
with a decrease in rejects
– Reduced banking costs
 Now a fully functional EDI company, this
corporation is able to handle any request for
electronic payment regardless of format or
source (domestic or international, vendor or
employee)
Section 3: EDI for Invoices and Purchase

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 Process Accounts Payable

Leading Practice/Benefits Approach

Orders
 Many organizations are moving to a paperless
invoice processing, which will link to the
electronic payables system. With this process,
eventually no one will touch paper throughout
the business cycle: purchase order through
payment and settlement.
Section 4: EDI for Taxes
 Many organizations also implement a
preauthorized debit transaction for paying state
and federal taxes
Section 5: Electronic Payments for
Disbursements
 Organizations can reengineer their payment
process by replacing a paper-based
disbursing/accounting (D/A) environment with
a system using:
– EDI
– Electronic receipts settlement (ERS)
– Imaging technology
Performance Measures
 Percentage of EDI (supplier invoices received
and electronically matched to purchase orders
and receiving documents)
 Volume of transactions handled electronically
 Payables processing time
 Cost per EDI transaction
 Number of supplier inquiries and complaints
 Number of errors
 Productivity enhancement based on
investment required
 Electronic payments (EFT/Financial EDI)
 Reduction in banking costs
 Percentage of staff reduction

Leading Practice Approach

Pay upon receipt of materials or merchandise

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 Process Accounts Payable

Leading Practice/Benefits Approach

at agreed-upon prices rather than receipt of the  Use the following approach:
invoice (“invoiceless processing”). – Find need
Benefits – Authorize purchase
 Reduction in required personnel – Order
 No paperwork in process – Receive
 Improved control over accounts payable – Pay
 Reduction in duplicate payments and errors  Include as much information on the PO as
 Lower cost per transaction possible:
 Simplified material control (financial record and – Unit price including freight, handling, etc.
physical record always match) – Preferred suppliers
 Increased accuracy of financial information – All terms of the purchase should be
negotiated in advance to avoid disputes
and erroneous payments
 Assign PO approval to the person responsible
for ordering
 Have receiving enter amount received directly
into the system to generate payment
– Ensure receiving personnel have access
to reliable purchasing information to
ensure accurate matching of receipts with
POs. Access to the receiving system
should be limited to avoid unauthorized
payments.
 Make payments electronically (EDI/EFT).
Performance Measures
 Payables processing time
 Percentage of suppliers on "invoiceless
processing"
 Volume of transactions on "invoiceless
processing"
 Number of errors
 Transaction cost

Leading Practice Approach

Strive for paperless storage (records retention) Section 1: Understand Requirements
and reporting.
 Understand current and projected document

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 Process Accounts Payable

Leading Practice/Benefits Approach

Benefits storage needs throughout the organization:

 Faster, more accurate document retrieval – Accounting
 Increased responsiveness to internal and – Personnel
external customers – Sales
 Elimination of lost or misfiled folders – Insurance
 Saved file storage space – Stock certificates
 Reduced time and telephone expense (no – Time cards
more supplier or customer call-backs) – Purchasing
 Faster indexing (automatic computerized  Ascertain state requirements for legal storage
document indexing) for individual companies. (In some states,
 Increased file integrity optical disks are legally unacceptable means
of storage.)
 Better management control
 Evaluate users' storage requirements and
 Reduced effort needed from records staff
reports generated to determine the possibility
 Reduced time needed to retrieve documents of specification or elimination
for auditors
Section 2: Develop Storage Process
 Simplify the reporting process (number of
reports generated) by eliminating identified
non-value-added reports
 Critically assess hardware and software
selection alternatives, including interfacing
capabilities with the current computer system
for document indexing purposes
 Formulate and prioritize an implementation
plan for a new document storage and retrieval
system
 Provide training and education to appropriate
personnel
 Form user groups and meet periodically to
assess opportunities for optimizing system
capabilities and productivity
Performance Measures
 Time spent conducting research
 Number of lost or misfiled documents
 Number of users
 Number of paper reports and documents
distributed

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 Process Accounts Payable

Leading Practice/Benefits Approach

Leading Practice  Evaluate the readiness of the corporate

Use “paperless” invoicing and payments where systems infrastructure to send and receive EDI
practicable. information

Benefits  Proactively identify electronic invoicing

candidates and establish transmission
 Saves on costs of paper-based transactions procedures
 Enables easier record keeping  Prepare and educate appropriate personnel
 Shortens turnaround time about the uses and benefits of the new method
 Eliminates expanding paperwork  Recognize which traditional business methods
are at stake in the crossover to non-traditional
 Automatically matches prices, purchase ways
orders, receiving statements and payments
when part of a high-quality system – Electronic records cause uneasiness for
some; paper records (cancelled checks,
 Frees up staff time for example) provide comfort
 Uses WORM (write once, read many) to – EDI shifts float patterns, requiring
ensure less chance of error negotiation with suppliers to:
 Improves accuracy and legibility of data o Ensure timely payments
– Enables companies to deal with o Obtain full discounts
exceptions only, since most routine
transactions go through easily Performance Measures
 Check processing time
 Savings from use of EDI, including check
processing costs
 Lower error rate

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