What Is Accounts Payable?

Accounts payable is a central function for any finance team. It differs from the other core financial functions because, in most organizations, it requires more steps, has more variation, contains more risk, and requires more compliance. It is often the culprit that delays month-end closes, generally takes more time, and absorbs more resources than other functions.

While revenue generation and strategic planning are critical to an organization’s success, understanding accounts payable is essential for ensuring smooth business operations, managing costs to drive profitability, building strategic vendor relationships, and managing cash flow. Accounts payable is part of a greater ecosystem that includes procurement and closing the books. This operation sits between the two in a much broader process.

Effective management of AP is paramount and requires processes and systems that span across much of an organization. This crucial function fosters positive supplier relationships and guarantees an uninterrupted flow of essential resources that fuel business operations. Delays or errors in this accounts payable process can disrupt the entire financial rhythm, leading to frustrated vendors, potential legal issues, and ultimately, a weakened financial standing.

What is accounts payable (AP)?

Accounts payable represents the short-term debt a company owes to vendors for goods or services received on credit.

Running a business requires trust — especially when it comes to paying vendors. Accounts payable acts as the bridge between receiving goods or services on credit and settling the bill later. It is like a system for tracking these outstanding payments, ensuring your business has the cash flow to cover them. AP sits at the heart of the procure-to-pay (P2P) process, acting as the bridge between procurement activities and closing the books.

Effective accounts payable management offers a multitude of benefits. It fosters stronger relationships with vendors by guaranteeing timely payments. It also provides a clearer picture of your company’s financial health by accurately recording these obligations. This accurate data translates to better financial reporting and helps you avoid accumulating excessive debt.

Modern technology is revolutionizing how businesses handle accounts payable. AP automation software streamlines the entire process, boosting tax compliance, empowering vendors with self-service options, and simplifying the approval workflow. With the accounting software market projected to surge in the coming years, it’s likely that your competitors are already leveraging this technology.

A study by the Institute of Finance and Management (IOFM) in 2022 revealed a concerning statistic: a staggering 84% of an AP professional’s workday is dedicated to repetitive, manual tasks such as data entry and chasing approvals. This highlights the prevalence of manual processes in accounts payable, with the Ardent Report (2022) estimating that 72% of AP tasks are still processed manually as of 2024. A Business Wire report said their teams dedicate up to 20 hours a week on AP tasks, amounting to possibly 1,040 hours annually.

Key components of accounts payable.

Navigating the accounts payable process requires an understanding of its fundamental components. These elements are the foundation for a healthy cash flow and positive relationships with vendors. Let’s break down the core building blocks of AP:

• Invoices: These are formal requests for payment from vendors, detailing the amount owed, payment terms, and a description of the goods or services provided. Efficient AP management involves verifying invoice accuracy against purchase orders and receipts, ensuring timely processing within agreed-upon terms.
• Vendor information: Up-to-date vendor details, including contact information, payment terms, and banking details, are crucial for a smooth AP process. This ensures efficient payments, minimizes disputes, and fosters strong relationships with suppliers.

• Payment terms: Negotiated between buyer and seller, these terms dictate the timeframe for invoice payment. Common terms include “net 30” (payment due within 30 days) or “2/10 net 30” (offering a 2% discount for payment within 10 days, with the full amount due within 30 days). Understanding and adhering to payment terms is essential for managing cash flow, capturing discounts, and avoiding late fees.
• Approval workflow: Before a payment is processed, the invoice undergoes an approval process. This ensures the billed goods or services were received and meet company standards. The workflow typically involves multiple departments (procurement, receiving, finance) and varies in complexity depending on company size and invoice amount.
• Credit terms: These terms, often stipulated on the invoice, specify the timeframe within which a company must pay for the purchased goods or services. Common credit terms include “net 30” (payment due within 30 days) or “2/10 net 30” (a 2% discount offered for payment within 10 days, with the full amount due within 30 days).
• Payment schedules: Based on credit terms and internal financial strategies, accounts payable departments establish payment schedules to ensure timely payments to vendors while optimizing cash flow.

Invoices vs. purchase orders in accounts payable.

Invoices and purchase orders (POs) are both crucial documents in the accounts payable (AP) process, but they serve distinct purposes:

• Invoice: An invoice is a formal request for payment issued by a vendor to a buyer after goods or services have been delivered. It acts as a bill that details the amount owed, a breakdown of the goods or services provided, payment terms, and due date. Essentially, it’s the vendor’s way of saying, “You ordered this, it’s been delivered, and now it’s time to pay.”
• Purchase order (PO): A purchase order is an official document issued by a buyer to a vendor to initiate the procurement process. It outlines the specific goods or services being ordered, the agreed-upon price, quantity, delivery timeframe, and payment terms. Think of it as a buyer’s way of saying, “We need this — please send it to us, and here’s how we’ll pay for it.”

Here’s a table summarizing the key differences:

Credit terms and payment conditions in accounts payable.

Credit terms, often outlined in the purchase order and reflected on the invoice, dictate the timeframe within which a company must pay a vendor for goods or services received. Here are some common credit terms and how they influence payment timelines:

• Net 30: This term means the full payment is due within 30 days of the invoice date. This is a standard credit term and offers the buyer a 30-day grace period to settle the invoice.
• Net 60: Similar to net 30, but the payment is due within 60 days of the invoice date. This term offers the buyer an even longer grace period but may not be as favorable to the vendor.
• 2/10 Net 30: This term incentivizes early payment by offering a discount (in this case, 2%) for payment within 10 days of the invoice date. The full amount is still due within 30 days. This benefits both parties; the buyer gets a discount, and the vendor receives faster payment.
• Cash on delivery (COD): In this scenario, payment is due at the time of delivery. This is often used for high-value items or when there’s a concern about the buyer’s creditworthiness.

Why does accounts payable matter?

Accounts payable plays a critical role in financial management and overall business success. Efficient accounts payable processes ensure timely payments to vendors, maintain positive relationships with suppliers, and contribute to accurate financial reporting. Furthermore, proper accounts payable management can help companies optimize cash flow by leveraging early payment discounts and strategically planning payments based on credit terms.

Airbase can revolutionize accounts payable operations by automating manual tasks, streamlining workflows, and providing real-time data for informed decision-making. Learn more about Airbase accounting automation and Airbase AP automation solutions.

Airbase can also be your one-stop shop for in-depth articles on all things AP! Explore here.

Manual data entry and paper invoices are a recipe for disaster in the world of accounts payable. Errors creep in easily, and misplaced documents lead to headaches and unimpressed auditors. These inefficiencies translate to a high cost per invoice processed. That’s the reason why companies are shifting to accounts payable automation to streamline AP business processes.

Airbase empowers businesses of all sizes to transform their AP processes, offering a comprehensive suite of features designed to save time and money:

• Effortless invoice capture: Ditch the manual data entry. Airbase utilizes intelligent optical character recognition (OCR) technology to automatically scan, extract data, and populate invoice information. Generative AI and MIL automatically populate the description and category so the accuracy improves with every transaction. 
  This eliminates errors and frees your team for more strategic tasks.
• Seamless purchase order matching: Airbase simplifies purchase order (PO) automation, ensuring two-way or three-way matching for complete accuracy. This eliminates overspending and strengthens your financial controls.
• Real-time visibility and control: Airbase provides a centralized platform with real-time insights into your AP operations. This empowers you to track spending, identify trends, and make informed decisions.
• Enhanced fraud detection: Airbase incorporates robust security features to safeguard your business. Automated fraud detection helps identify suspicious activity and prevent fraudulent payments.
• Streamlined vendor management: Airbase simplifies vendor onboarding and management. Your vendors can easily submit invoices and update their information directly within the platform, minimizing manual data entry on your end.
• Automated workflows and approvals: Airbase streamlines the invoice approval process with customizable workflows. This ensures proper authorization and eliminates bottlenecks.
• Faster reconciliation and reduced costs: Airbase automates payment reconciliation, eliminating the need for manual processes. This saves time and reduces the risk of errors, ultimately lowering your overall AP costs.

The human touch, amplified.

While automation is a powerful tool, the human element remains crucial in AP. Airbase empowers your team to focus on strategic initiatives, like vendor relationship management and process optimization. Let Airbase handle the repetitive tasks, freeing your team to focus on what matters most.