Defining the accounts payable function in a business

Defining and Understanding the Role of Accounts Payable

5 June 2024 | Written by Innovus

Business Services

If you run a company that deals with multiple suppliers, contractors, and outgoing payments, getting a handle on your accounts payable is crucial. Accounts payable (AP) refers to the money your business owes to suppliers and other creditors for goods or services received. Staying on top of accounts payable processes is especially important for businesses in the property management and construction industries that regularly work with many vendors.

In this guide, we’ll explain the meaning of accounts payable, why streamlined AP is so valuable, the role of the accounts payable department, considerations for high-volume and multi-entity scenarios, and the benefits of potentially outsourcing this function.

What Does Accounts Payable Mean?

Accounts payable are the current liabilities owed by a business to its suppliers and creditors from purchasing goods or services on credit. Unlike long-term debt obligations, accounts payable cover short-term debt from recent purchases that need to be paid within a given period based on pre-defined payment terms, usually within 30-90 days.

For example, accounts payable for a property manager might include amounts owed to contractors for maintenance and repair work, utility companies for electricity and water service across multiple properties, suppliers of cleaning products and equipment, legal advisors and other professional service providers. Any recent purchases from third-party vendors that haven’t yet been paid would be listed under the accounts payable category on the company’s balance sheet.

Accounts payable is effectively the opposite of accounts receivable, which refers to payments owed to the company itself rather than amounts it owes others. Properly managing both payables and receivables is key for maintaining positive cash flow.

The Accounts Payable Process

The typical accounts payable workflow involves several key steps:

  1. Vendor invoice received
  2. Invoice reviewed, coded, and approved
  3. Liabilities recorded in bookkeeping/accounting system
  4. Payments processed and sent to vendors

For property businesses, there are additional compliance considerations under the Construction Industry Scheme (CIS) that governs how payments to subcontractors for construction work are handled.

Having a defined process with clear roles and approvals is important, but executing the accounts payable function efficiently is equally crucial. Paying vendor invoices too late can strain supplier relationships, result in late fees, and disrupt your cash flow. However, paying prematurely before properly vetting invoices opens the door to duplicate or erroneous payments.

Finding the right balance and creating a streamlined accounts payable process yields significant benefits, including:

  • Improved cash flow through early payment discounts
  • Stronger supplier/vendor relationships and service
  • Reduced overhead and processing costs
  • Tighter financial controls and accurate reporting

Many businesses still rely on manual, paper-based processes to manage accounts payable. This opens the door for costly errors, delays, and lack of full visibility. Automating AP processes through integrated software systems and workflows is a best practice approach.

Role of the Accounts Payable Department

Within a business organisation, the role of the dedicated accounts payable department or team is to handle all tasks related to processing and paying vendor invoices and expenses. Typical responsibilities include:

  • Collecting and verifying invoices received
  • Obtaining proper coding from budget managers
  • Keying invoice data into the accounting system
  • Applying requisite approvals and following process
  • Issuing timely payments to vendors (via check, ACH, etc.)
  • Reconciling statements and resolving disputes
  • Managing vendor master data files

A well-run accounts payable department needs team members with excellent organisational abilities, astute attention to detail, solid communication skills, and facility with technologies like accounting software, automated workflows, and reporting tools. For many organisations, it makes sense to leverage accounts payable automation to enhance efficiency, accuracy and control.

The accounts payable team at Innovus processes over 550,000 invoices per year valued at £460 million across our diverse client base. This volume underscores the need for robust, optimised processes and technologies.

Handling Accounts Payable for Multiple Entities

While accounts payable is a common requirement for most companies, the situation can become exponentially more complex for businesses dealing with high AP volumes across multiple entities, properties, and business units. This is a frequent scenario for:

  • Property management companies overseeing payments for dozens or hundreds of properties
  • Construction firms with payment obligations to contractors, suppliers, etc. for each project
  • Any business with a decentralised regional or multi-site operating model

In these environments, it is critical to have a “hub and spoke” model where accounts payable is centralised at a head office location. This allows for:

  • Consolidated visibility into total payables and future liabilities
  • Enforcement of standardised processes and controls
  • Economies of scale in staffing and technology
  • Stronger negotiating power with suppliers

However, segregating duties is still important to reduce fraud risk. At Innovus, our accounts payable services include built-in safeguards and approval workflows, even as we provide centralised payment processing across our clients’ countrywide property portfolios.

Outsourcing Accounts Payable Services

For companies that don’t have the internal resources, capabilities or desire to directly own the accounts payable function 100%, outsourcing some or all of it to external service providers is an option to consider. This is especially common for companies focused on their core lines of business who want to offload non-core administrative processes like AP.

Working with an accounts payable outsourcing firm offers many potential advantages:

  • Access to dedicated AP process, technology and compliance expertise
  • Scalable resources to handle fluctuating workloads
  • Potential cost-savings over maintaining in-house teams
  • Improved controls, segregation of duties, and oversight
  • Timely payments to sustain vendor relationships and discounts

Of course, care must be taken in vetting and selecting a qualified, trustworthy AP partner. Companies should look for providers with deep accounts payable experience in their specific industry, a track record of superior service delivery, robust process controls and data security practices, and a future-focused approach incorporating technologies like machine learning and robotic process automation.

For Innovus, providing strategic accounts payable services for nationwide property portfolios and construction projects is a core specialty backed by 80+ years of combined AP experience among our expert team.

Don’t Neglect Accounts Payable

As this guide hopefully conveys, having a solid grasp of what accounts payable means, why streamlined AP processes are so valuable, and the role accounts payable plays or could play in your business operations is critical.

For property management companies, developers, construction firms, and any business dealing with a high volume of payments, suppliers, and AP complexity, taking a strategic approach to accounts payable is well worth the investment. Automating AP through software tools and/or partnering with specialist outsourcing firms to handle the heavy lifting can reap substantial rewards in financial management, compliance, cash flow, and supplier relationships.

If your existing accounts payable function feels unorganised, error-prone, or lacks strong financial controls, it may be time to engage external experts to optimise this back-office pillar. Contact the accounts payable team at Innovus to discuss a potential consultation or managed services engagement for your business.

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