Small town business owners

An effective accounts payable (AP) process will improve your business's cash flow and profitability. As such, many organizations invest in financial software to help them manage every stage of the procurement and contracting process, but IT investment is only part of the solution. If you want accounting software to drive financial improvements, you need to review all the processes that support your AP function. Make the most of your AP software with the five following best practices.

Establish separation of duties

A robust payment process should involve different people at each stage. For example, you may have one person (or team) approving purchases, while somebody else approves invoices for payment. Accountants refer to this hierarchy of financial controls as separation of duties, and it's crucial to your business.

Clear separation of duties allows you to have more control over what you spend. This way of working helps you control fraud and errors, and also makes sure everybody works to the same standards and targets. Separation of duties also gives you clearer accountability at an employee level and cuts the risk that the process falls down because somebody is off work.

Procurement and financial software supports separation of duties, but you have to define how this will work across your business before you can use a system to enforce the process.

Set invoice structure requirements

According to the size of your business, you may need to work with many suppliers. To pay these suppliers quickly, it's vital that they submit invoices in a way that helps you process them efficiently. Prompt payment works well for both parties, so it's in your suppliers' interests to follow your guidance.

Suppliers cannot follow guidelines if you don't set them. Make sure your suppliers submit invoices that allow you to process documents through your software promptly and without exception. For example, it's generally easier to set a naming or numbering standard, or you will find it difficult to catalogue and control invoices. Apply these standards to all formats, including paper and digital invoices, and reject invoices from suppliers who continually fail to meet your requirements.

Define business processes that meet your service level agreements

An effective AP process will fail if one person in the chain doesn't complete his or her role in a timely fashion. Paper invoicing processes are unwieldy and slow, but financial software can't drive improvements in performance if you don't develop and communicate processes that everybody in the approval chain must follow.

Set a clear service level agreement (SLA) for each person or team in the approval chain. Monitor and act promptly on exceptions. Software generally provides your people with the tools they need to navigate the AP process, but you still need to make sure everyone knows what to do and when to do it.

Consistently use purchase orders

Purchase orders define terms between a supplier and a buyer. Generally speaking, a purchase order will set out the items you want to buy, the price, the delivery details and the terms of payment. Put simply, a purchase order agrees everything up front, after which everyone just follows the terms laid out in the document.

Purchase orders also help remove time and confusion later in the process. If an accounts payable team can easily link an invoice to a purchase order, the payment process becomes quicker and less prone to error. As such, it's vital that your employees use purchase orders as often as possible.

AP software usually features a purchase order template, but the process won't work if people don't use it. Set a clear policy about use of purchase orders and monitor adherence to the rules. Drive people to use these documents all the time by warning cost centre owners (and suppliers) that you may not approve transactions without a purchase order.

Set sensible approval limits

You can drive efficiency improvements if you remove approval thresholds on small amounts. For example, do you really need the finance director to review and approve invoices below $500? Exhaustive approval thresholds won't necessarily help you drive the financial control you are looking for. Indeed, these approval limits will normally just slow down the process and create more manual effort.

Carefully balance financial risk against efficiency. You can adopt spot checks or audits to give you a greater degree of confidence, but don't allow excessive controls to bog down your AP software processes.

Financial software can reap enormous productivity benefits for your business, but your people must work in a way that effectively supports these tools. To get the most from AP and procurement software, you must first make sure you have the right supporting processes.