Getting your accounts payable department into sterling shape will quickly eliminate paying double invoices and avoid costly late fees.

By: David Rudofsky

Strengthening the accounts payable function at your company won’t change your life, but when you consider the number of invoices you pay in a year, it will prevent costly errors, give you a better understanding of liabilities, avoid late fees, reduce damage to your credit reports and help improve cash flow.

Here’s what you should be doing:

Have all invoices mailed directly to the individual responsible for accounts payable, who should closely review all invoices received. (They should not be going to the person who ordered the product or service). This reduces the risk of lost, mishandled or double-paid invoices. Invoices should be logged into the bookkeeping system when they are received (or could be batch processed weekly). To avoid paying the same invoice twice, check the dollar amount and invoice number against previously paid invoices. Invoices that are not original copies should be most carefully checked. For invoices that will require a signature from a manager to approve payment, a copy should be forwarded (clearly marked as such) approved and promptly returned to accounts payable. When applicable, accounts payable should also check that the due dates on invoices comply with the terms agreed to when the purchase was made, and also that the invoice date is consistent with when the goods were received or the service was performed.

Share the knowledge. Encourage everyone in your organization to proactively share information and documents with accounts payable. For example, individuals who receive goods or services can help out by creating a receiving report, which they send along to accounts payable.

Take advantage of your vendor discounts. As far as payment timing goes, it almost always makes sense to take advantage of supplier discounts for quick payments when they are offered, such as a 2% discount for paying within 10 days. When there is no discount offered, the optimal timing for payment will depend on a variety of other factors, such as your relationship with the supplier and your business’s cash position.

Accounts payable activities should be supervised and reviewed. The owner of the business, or his delegate, should take the opportunity to check that the invoice process, as described above, is being done correctly and consistently. One way to effect this is to require a second signer for all checks above a certain dollar amount. (For business owners who habitually are holding on to the accounts payable function, this second-signer dollar limit may create a framework that allows them to comfortably delegate accounts payable responsibilities for the first time, freeing up more of their time to focus on sales and marketing.)

In addition to having a second set of eyes looking for invoice errors, the owner of the business will also likely have greater perspective on supplier pricing. It is not unusual for a business owner to spot errors or savings opportunities that others do not see. An owner of a $2 million shirt embroidery business noticed that a supplier had issued credits to their account but was not deducting it from billed amounts.

Segregation of responsibilities should  always be taken into account when assigning responsibilities for accounts payable, purchasing, inventories and bank reconciliations. It is better not to have the same individual negotiate prices and approve the invoices, and it is also better not to have the same person sign the checks and do the bank reconciliation. Finally, checks can be signed on a weekly or biweekly basis, but anything less frequent than that puts you at risk of making unnecessary late payments, alienating suppliers and damaging credit ratings. Grouping and batching the invoices to be paid is a good way to stay efficient.

Accounts payable will never be the most glamorous responsibility in your organization, but it will always be an important one. By paying attention to these basics, you can make sure your accounts payable function is not a hidden cause of cash leakage due to inaccurate, late or double payments.