As a Chief Financial Officer (CFO), you most certainly understand the critical role that the Accounts Payable (AP) function plays in the smooth operation of your business. However, if you were to suggest to the members of your organization about its importance, they might not agree with you. In fact, it is one of the most underappreciated functions in a business.
Managing the AP process is not just about processing invoices and making payments, it is about optimizing the cash flow, building and strengthening supplier relationships, and most importantly, mitigating financial risks.
When implemented poorly, AP can become one of the greatest reasons for risk and unnecessary losses in a firm. Similarly, this function can make a CFO a top performer with the right strategy, investment in the right automation tool, and correct management and oversight.
The accounts payable process is an essential part of managing the finances and accounting of a business. With money flowing in and out at all times, it is critical to maintain close internal controls and methods to avoid overpaying or settling invoices inaccurately.
In this article, Finsmart Accounting – globally trusted for accounts receivable outsourcing services – will share everything about the accounts payable process and challenges faced by CFOs. Let’s start!
Accounts Payable KPIs that CFOs Must Track
Before we get into the intricacies of how CFOs can solve their AP issues, let us talk about the KPIs they should follow to ensure smooth operations of their AP processes:
Average Processing Cost Per Invoice: Although this is direct and obvious, it is not as easy as it sounds. The productivity metrics include:
1. All costs of processing payments
2. Operational expenses
3.Costs of suppliers
4.Costs of products and services
Given the fact that still a huge amount of invoices are prepared manually, this is a time-consuming and error-prone process. With automation, CFOs can not only cut down costs but also time.
Invoice Processing Cycle: This metric helps understand where your AP team loses most of the time. Besides identifying lengthy and time-consuming tasks, this metric can also be used to avoid penalties, borne by late payments. Businesses, using a manual process, waste a lot of time in completing the life cycle of an invoice and this can be reduced marginally with new-age automation tools.
Days Payable Outstanding (DPO): This metric is indicative of the total number of days your business takes to pay the vendors. A high or low DPO can severely impact your business. Although the high DPO can seem to be beneficial as it gives you additional cash, late payments ultimately hamper your relationship with your service providers. Similarly, a low DPO is indicative of the fact that your business isn’t making complete use of the credit period. This could also indicate a different anomaly in the business process.
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Payment errors: Needless to say, this is one of the most alarming situations for your business. Error in payments can strain the normal flow of businesses and impact relationships with vendors.
Entering incorrect payment data, paying the wrong amount to the wrong vendor, multiple issuance of the same invoice, and late payments are some of the most common payment errors. It is essential to keep track of the degree of errors that are happening.
The higher the amount of errors, the more likely the business will suffer a loss. Tracking the errors not only prevents losses but also notifies of the probability of fraud.
ROI on automation of invoices: Automation of invoice processes is known to make the business processes easy and efficient. However, it is not enough to adopt a tool and not keep track. Especially, if you have just overtaken the responsibility of a CFO, it might be a better idea to track the ROI generated.
Factors like the average salary of an AP staff, time and resources spent on each invoice are also considered. This metric also helps understand what you need to change for business growth.
Common challenges CFOs face in the AP process
Firms and their CFOs perform several AP tasks daily. However, some struggles can not be ignored:
Lack of speed in processing: Manual invoice processing and paper-based documentation take up a lot of manhours. It slows down the entire system of AP. Delayed or faulty payments can often lead to poor relationships with vendors and late fees.
Cross-checking the errors: To ensure there are no discrepancies in the amount, date, or recipient of the payment, it is important to cross-check and get approvals from the CFOs. This is a lengthy process and it is on the CFO to avoid discrepancies and give a go-ahead for all payment processing.
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Missing invoices: When dealing with a heap of paperwork and emails daily. Invoices can get misplaced. This not only causes issues with the vendors but also causes a huge problem with the balance sheets and income statements. In case the AP team does not check and cross-check all information carefully, management, including the CFOs, is posed with the incorrect financial position of the business.
Chances of fraud: Many businesses lose a certain percentage of their revenue each year to fraud. It is essential for the AP teams, followed by the CFOs to be on the lookout for false invoices or other types of fraud in account payable.
Double payments: When manual data entry is involved, it is not just a matter of slow process, it also leads to double payments. Inconsistencies, carelessness, or a simple overlooking can lead to a single invoice being paid twice. This leads to the AP teams chasing suppliers to return the money or they face issues in the next month’s accounts payable.
Tips for CFOs to manage AP processes more efficiently
Set KPIs and Targets: Preliminarily, efficiency is about achieving goals and deadlines with the least amount of time and money. To optimize your Accounts Payable team’s efficiency, CFOs must set time and cost limits, measure the progress and success with tangible KPIs.
Simplifying projects and breaking them into manageable pieces is the first step towards achieving the milestones. However, make sure to set realistic targets, depending upon the resources and the means of completion available.
Help the team improve communication: The gaps within AP processes often go unnoticed due to communication gaps. Effective communication leads to teams conveying a discrepancy and asking for help instead of trying to chase the unattainable. Professional communication can be tricky sometimes and that is why the responsibility of helping the team build this soft skill lies with the CFOs.
As a leader, you must keep the teams aware of the goals, deadlines, and the management’s expectations. It might be wise to use an internal communication tool/platform to keep everyone in the loop. Encourage two-way communication and pay attention to what your teammates have to say.
Use the right tools: Automation makes the AP process easy for the entire business. Difficult business processes have been streamlined through these tools. Given the amount of data you have to deal with daily, going paperless is the way to go. Tools like QuickBooks and SAP can help with the team’s productivity and efficiency. Using automation tools also helps reduce overall time and errors.
Prioritize reimbursements: Your reimbursement policies must match the industry standards. As a CFO, there are a lot of policies that you can alter. For example, if you do not have it, already adopt reimbursement-friendly policies that clearly define accurate submission dates and payment timelines. This helps employees receive timely payments and minimize the need to loan their finances to the organization.
Outsource your AP process: When you outsource your AP processes, your partners dive deep to understand your business, curating a personalized approach. They understand what makes your business unique and how. They help tailor a solution that is meant just for you, which ensures accuracy and precision. From processing invoices to vendor payments they know about and do it all.
Outsourcing accounts payable helps you provide the best services and solutions to your clients without making a dent in your pocket. Outsourcing also helps you save time to do what you do best – grow your business. Your outsourcing partners are skilled at their jobs and they are equipped to provide you these services, which means reduced errors. With the wealth of expertise they bring to the table, your outsourcing partner helps you become the expert for your clients.
Bringing efficiency in Accounts Payable: Final note for CFOs
Effective Accounts Payable management is a multi-layer process that requires impeccable strategy, technological advancement, and attention to detail. As a CFO, mastering AP management is not just about helping the business cut costs but is about finding the right value, mitigating risks, and bringing operational excellence. It is also about fostering a culture of continuous improvement.
While adopting strategic measures is a great decision for the business, it is a time-consuming and expensive affair. By outsourcing this task, you get a comprehensive solution that has low costs.
The team at Finsmart Accounting is equipped to handle AP queries, solve complex issues, and help streamline workflows and processes. Have more questions? Write to us at connect@finsmartaccounting.com
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Director Growth Strategy & Alliance
Maanoj Shah is a finance and outsourcing expert with strong Business Strategy and Scaling-up experience. Over the last 20 years, he has incubated multiple businesses and helped build global enterprises in verticals as diversified as hospitality, technology, and healthcare.
