A company’s Accounts Payable (AP) function can be one of the most stressful and challenging jobs in the business.
Every company deals with accounts payable at some point in their business operation, and it’s common to think that Accounts Payable is just the department that goes over the bills, but they have so much more to do than just that.
The AP department is responsible for getting paid by vendors, reporting on that information to other departments, and getting everything ready to pay invoices accurately and on time.
They play an essential role in the company’s internal and external operations, which is why it’s necessary to make sure that your AP department knows how to tackle challenges in their work effectively.
However, as with any business function, there are a few obstacles that AP departments face while operating, which can have negative consequences on your business’s cash flow and overall financial health.
In this guide, we’re going to take you through the top 10 challenges that companies face in regards to accounts payable and how accounts payable departments can deal with them, no matter what size or industry they fall into.
But before digging deeper, let’s understand what account payables are.
What Do You Mean By Accounts payable?
Accounts payable (or AP) is the department within the finance department of a company responsible for collecting, reviewing, and paying all invoices owed to suppliers or vendors by the company and all outstanding payments owed by the company to outside parties.
A/P payables invoices are usually paid in 30 days. The term payables has multiple meanings depending on the industry and accounting practices. In manufacturing companies, accounts payable are physical materials that need to be purchased and stocked. They typically refer to inventory items such as raw materials or supplies.
When it comes to corporate finance and treasury management payables, they mean bills that must be paid immediately. While some firms use bank financing or short-term loans to fund their daily operations, most businesses utilize their own cash resources.
This means that businesses are left with a daily cash flow problem that needs to be solved, and accounts payable helps manage these incoming and outgoing payments.
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Also Read: 8 Tips to Reduce Errors in Accounts Payable
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According to statistics, 80% of all small business failures occur due to poor management of expenses or poor cash-flow management.
Good accounts payable software is essential for every business because it helps in maintaining all the records including purchase orders, receipts, and invoices. Keeping good accounts payable helps in maintaining good business relationships with vendors that boost credit ratings and also improve overall efficiency. Using statistics software is also essential when it comes to busineses to collect and analyze data.
How Can Negative Accounts Payable Affect A Company?
Negative accounts payable can have a dramatic effect on a company’s cash flow. Whether it’s through bad debt, lost invoices, or incomplete records, a large number of companies are paying their suppliers late.
Delays in paying your vendors lead to longer payment terms, making cash flow planning very difficult to estimate. If you can’t estimate your company’s cash flow accurately, it becomes hard to predict where and when you will need money and how much it will cost you. This creates a cycle that eventually eats away all your profitability.
Companies discover that negative accounts payables have become an endemic problem that costs them a lot to fix. Indeed it takes discipline, organization, and management skills to keep track of payables, but it’s worth doing from a cost perspective alone.
Reducing bad debts by even 5% saves businesses hundreds of thousands of dollars each year. In fact, most businesses aren’t even aware of just how big an impact bad debt has until someone steps back and looks at the big picture.
So, as of now we know what is account payable and how it can affect our business.
Now, It’s time to look at the top 10 challenges that companies face in regards to accounts payable and how accounts payable departments can deal with them.
10 Biggest Accounts Payable Challenges Every Company Is Facing
1) Manual Cash Management
Manual cash management is a more traditional and old-fashioned way of managing your company’s day-to-day cash flow. It requires that you manually handle incoming and outgoing payments as well as bank deposits or withdrawals, which can take days to process.
Manual cash management can affect your company’s liquidity if you don’t manage it properly. Managing large volumes of physical cash can also be risky in terms of theft, damage, or loss, and manual processing can delay settlement times compared to electronic banking methods.
To deal with this, you can opt for third-party financial solutions where an entity manages multiple companies’ accounts payables under one umbrella. This will help your business manage its cash flows better than before.
2) Processes Aren’t Up to Speed
According to a study by BIS, out of all of their respondents, companies who handle between $100 million and $2 billion in annualized revenue, 64% reported that they’re getting paid late every day, while 21% said they were getting paid less than three days late.
The big problem here is late payments.
Late payments hurt cash flow and force you to pay more money in interest rates on your existing debt which means you’ll have even less money for payroll. It also makes it harder to take advantage of opportunities when they arise.
To deal with these chronic payment issues, you may need to implement new internal AP processes around invoice management. For example, some companies are experimenting with an automated-billing system in which invoices are automatically sent after delivery of services or products.
Another option is integrating software into your accounting systems so that you can quickly analyze accounts receivable data and get earlier warnings about potential billing problems, problems in accounting or inconsistencies.
By doing this, your business can reap the benefits faster rather than spending time worrying about late payments from customers.
3) Inaccurate Data
The biggest error in accounts payable and invoice processing can be attributed to inaccurate data.
Inaccurate or missing data can cause several issues for vendors, including slow payment or delayed payments which are a curse for business relationships. When information is sent incorrectly from accounting to finance, invoices go out late; when invoices go out late, but payment terms aren’t changed, then vendor relationships suffer.
So before sending any data between departments, verify accuracy and make sure it makes sense. 12% of all payables errors come from human mistakes such as incorrectly keyed data.
Again, before transferring data, ensure that it was entered correctly and verifiably before being transmitted elsewhere. Be diligent about accurate data entry!
4) Theft And Fraud
Every year, a company loses 5% of its revenue to fraud and theft. It’s estimated that $3 trillion in worldwide revenues is lost to various types of fraud every year.
This causes Accounts payable professionals sleepless nights! And at the end of their nine-to-five shifts, you can bet they’re doing everything they can to make sure their organization isn’t on that list. Unfortunately, this just gets harder every day without internal controls in place.
To avoid this fate for your company, start thinking about security measures like increased anti-fraud training or new policies limiting how/when employees can issue payments.
The more you know about what business risks you face, the more steps you can take to help mitigate them.
5) Growth Rate vs. Accounts Payable Turnover
While growth can be a sign of a company’s potential, it also means additional work for your accounts payable department.
As your company grows, your account payable team will need to figure out how to manage larger volumes of invoices, both from new suppliers and from existing suppliers with greater payment terms. This growth creates challenges for account payable professionals who are used to managing smaller amounts of accounts on a day-to-day basis.
Business owners, who typically don’t sit in their companies’ account payable departments, should know what changes may come in their businesses as they grow.
If they don’t adapt to these changing needs. In that case, they could set themselves up for errors that could damage relationships with suppliers, delay payments and negatively impact financial ratios like accounts receivable turnover rate. That’s why business owners must understand these key metrics and take the required measures.
6) Erratic Processing
While most small-business owners have some level of control over their cash flow, a significant number are plagued by erratic processing, which can make managing a company’s accounts payable process challenging.
In fact, most businesses lose up to $1 million in sales annually due to late payments and down payments on goods and services rendered due to erratic processing.
To handle this challenge, consider working with your clients and vendors to set standard terms for payment. You can avoid these issues, which will reduce your risk for chargebacks and boost your cash flow.
7) The Vendor Isn’t Communicating Correctly
If you’re having trouble getting a vendor to answer your questions or provide you with requested documentation, it could be for several reasons.
This could be because there’s some financial error in their favor that they want to protect by keeping quiet about it, like duplicate billing, or maybe their system is down, and nobody knows how to fix it! Whatever issues you’re experiencing, remember that vendors are just as busy and stressed out like everyone else. If you think something might be wrong, don’t hesitate to dig deeper into things with them.
Let them know right away that there needs to be an improvement in communication so you can get back on track with payments. Hopefully, they will respond accordingly and work to rectify an issue if there’s genuinely one at hand. Keeping lines of communication open between your company and its vendors can help prevent late payments from arising.
8) Double Payment Error
One of the top accounts payable challenges in the industry is double payment error. Some companies handle invoices with auto-pay, and others cannot review every invoice before paying it. As a result, many small companies suffer from payments twice or more.
For example, you have two vendors that ask for 1$ invoice each, and you both paid them on the 30th day of the month, so on the 31st day, those invoices were auto-paid again by the account payable department. So what will you do then? Nothing but wait for the rest of 15 days until the 60th day, when your bank account will be debited by $2.
Reviewing all your invoices manually can be complicated, but imagine how hard it will be if there are thousands of invoices.
To tackle this problem, you can use an effective system for reviews. After implementing this system correctly, you don’t need to check it manually. Just run reports, and you will be alerted when something suspicious is found.
This will help you to save time and money. Also, reviewing your reports once a week will help you catch mistakes sooner rather than later because, after four days of old invoices, your brain cannot work as effectively as fresh ones.
9) Receiving Invoices From Multiple Channels
Receiving Invoices from multiple Channels can create chaos in your accounts payable department. It can affect your finances, cash flow and cost you time. Managing these invoices from different channels manually will increase a headache for your accounts payable managers too.
To avoid this you need to be organized and prioritize which invoices you pay first. It’s also a good idea to maintain records of paid invoices so that if an invoice comes up twice or as an adjustment due to a price decrease, you are able to easily identify which invoice was actually paid.
10) Overpayments
As it turns out, one of the biggest challenges facing businesses today when dealing with accounts payable departments is overpayments. Accountants receive invoices from many companies, and when they pay vendors and service providers, they’re often not keeping track of who has been paid what.
It’s a huge problem for both parties. The vendor will either say that you never paid them or that you already paid them, and there’s no way to prove otherwise.
Now imagine how much time and money could be saved if each company kept its own payment history records. Each transaction would be matched up accordingly through each client’s unique identifier assigned by your business management software provider, eliminating both overpayment issues as well as late payment/no payment issues.
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Also Read: Sprint Planning: 8 Best Strategies for Successful Project Management
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Conclusion
Whether it’s a large corporation, mid-sized company, or even a small business, managing accounts payable (A/P) is a challenge that all companies face. Fortunately, there are some solutions available to help address these challenges.
In our guide, we have covered every company’s ten most significant accounts payable challenges. We have also included some tips to make your accounts payable management easier for you and for your clients. Feel free to use one of them if you think it fits your needs more than another option you already know about!
We hope that reading through our Accounts Payable Challenges guide was informative and fun! Stay tuned for more guides on essential business topics.
If you have any suggestions or questions, please feel free to ask them in the comments below.
Also, feel free to let us know if you think we forgot anything important in our list of challenges.
Good luck with managing your accounting payable, and good luck with your business!
Thank You !!
