Accounts Payable: Definition and Process

What is accounts payable? Have you set up a proper AP process to avoid fraud and embezzlement? Have you maximized your AP process efficiency to avoid excessive administrative expenses? 

Read on to learn about the definition of AP and AP processes.

What is accounts payable?

Accounts payable is short-term obligations (aka bills) due to vendors for services or goods received. Note the distinction between paid vs. payable – bills paid are no longer part of AP. AP statements are a standard report out of all accounting systems.

What are examples of accounts payable?

Every vendor bill you receive in email or paper mail is part of your accounts payable. Auto-pay bills may not be part of the AP workflow but are technically included in accounts payable. A third accounts payable example is cash paid to vendors. 

What is the accounts payable process?

The accounts payable process is a system of tools, staff, and procedures designed to prevent fraud and efficiently pay vendors on time. A good AP process maintains control over cash outflows without excessive expense or staffing. 

Accounts Payable Tools

Modern AP tools are paperless, such as or ERP software. When correctly set up, AP tools control spending by segmenting responsibilities, creating checks and balances, and preventing users from subverting rules.

IT security tools are also an essential part of AP systems. Password managers, encrypted data storage, and backup systems are vital in avoiding AP fraud. 

The following AP tools are old and prone to small business fraud, thus should be removed from your accounts payable process:

  • Receiving and scanning mailed-in invoices from vendors.
  • Issuing paper checks to vendors.
  • Paying vendors through bank bill-pay systems.
  • Using anything but strong, unique passwords in a password management system.
  • Sharing logins for bank accounts, accounting systems, or other accounting tools.

Accounts Payable Staff

AP must involve at least two but ideally three different staff members to cover the following roles:

  1. Bill entry clerk
  2. Bill approval manager (this could be a manager, a PO approver, or a warehouse receiver)
  3. Bill payment manager

Since hackers commonly target AP staff, all employees maintain a continuing education in cyber-fraud techniques and detection.

Accounts Payable Procedures

A scheduled AP procedure ensures bills are processed quickly, accurately, and with minimal expense. AP procedures are customized to each organization’s unique needs but commonly include the following elements:

  • How bills are received
  • How frequently are bills processed
  • What is required to enter a bill into the system
  • Who approves bills (often defined in a master vendor file)
  • How to manage bank account changes for vendors
  • How to set up a new vendor 
  • How frequently are vendors paid
  • Who is authorized to pay vendors
  • Who reviews monthly AP statements

Due to incorrect, manual, or outdated methods, inefficient AP processes require $15-30 to process each bill. That does not even account for the risk of fraud, which often bears catastrophic expenses. By comparison, an outsourced AP service like CFOshare costs $7.50/bill by leveraging best practices, automation, and economies of scale.

How do outsourced AP services work?

Outsourced AP services deploy best practices at a large scale. By standardizing and replicating an accounts payable process, they can ensure efficient, timely, and low-risk bill processing. If you are interested in learning if an AP service is right for your business, contact us to meet with our CFO consultants. 

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